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Effects of Growth and Volatility in Public Expenditures on Economic Growth: Theory and Evidence

Author

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  • Liutang Gong

    (Guanghua School of Management, Peking University
    Institute for Advanced Study, Wuhan University)

  • Heng-fu Zou

    (Guanghua School of Management, Peking University
    Institute for Advanced Study, Wuhan University
    Development Research Group, The World Bank)

Abstract

This paper sets up a theoretical model linking the growth rate of the economy to the growth rate and volatility of different government expenditures. On a theoretical basis, it is found that volatility in government spending can be positively or negatively associated with economic growth depending on the intertemporal elasticity in consumption. On an empirical basis, it is rather surprising to find no association between growth in capital expenditure and output growth, whereas growth in current expenditure seems to stimulate output growth. In particular, growth in transportation and communication seems to have a negative effect on output growth. It is also very interesting to find that the rises in the volatility in the growth of general public services, transportation, and communication have a positive effect on output growth.

Suggested Citation

  • Liutang Gong & Heng-fu Zou, 2011. "Effects of Growth and Volatility in Public Expenditures on Economic Growth: Theory and Evidence," CEMA Working Papers 494, China Economics and Management Academy, Central University of Finance and Economics.
    • Handle: RePEc:cuf:wpaper:494
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    References listed on IDEAS

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    Cited by:

    1. Dai, Darong, 2011. "Modeling the minimum time needed to economic maturity," MPRA Paper 40583, University Library of Munich, Germany, revised 08 Aug 2012.
    2. Dongmin Yao & Yijing Chen & Yixuan Xu, 2021. "How Public Expenditure and Bank Credit Affect Growth: Provincial and Enterprise Level Causal Evidence from China's 2008 Wenchuan Earthquake," Annals of Economics and Finance, Society for AEF, vol. 22(1), pages 195-231, May.
    3. Deng, Kent & Shen, Jim Huangnan, 2019. "From state resource allocation to a 'low-level equilibrium trap': re-evaluation of economic performance of Mao's China, 1949-78," LSE Research Online Documents on Economics 101127, London School of Economics and Political Science, LSE Library.
    4. Martha Elena Delgado-Rojas & Hernán Rincón-Castro, 2017. "Incertidumbre acerca de la política fiscal y ciclo económico," Borradores de Economia 1008, Banco de la Republica de Colombia.
    5. Agnese Sacchi & Simone Salotti, 2017. "The influence of decentralized taxes and intergovernmental grants on local spending volatility," Regional Studies, Taylor & Francis Journals, vol. 51(4), pages 507-522, April.
    6. Afonso, António & Furceri, Davide, 2010. "Government size, composition, volatility and economic growth," European Journal of Political Economy, Elsevier, vol. 26(4), pages 517-532, December.
    7. Dai, Darong, 2011. "Time as an Endogenous Random Variable Smoothly Embedded into Preference Manifold," MPRA Paper 40182, University Library of Munich, Germany.
    8. Wang, Chan, 2012. "A very preliminary survey on growth and development," MPRA Paper 39037, University Library of Munich, Germany.
    9. Deng, Kent & Shen, Jim Huangnan, 2019. "From state resource allocation to a 'low-level equilibrium trap': re-evaluation of economic performance of Mao's China, 1949-78," Economic History Working Papers 101127, London School of Economics and Political Science, Department of Economic History.
    10. Po‐Sheng Lin & Cheng‐Te Lee, 2012. "Military Spending, Threats And Stochastic Growth," Bulletin of Economic Research, Wiley Blackwell, vol. 64(1), pages 8-19, January.
    11. Juncheng Feng & Rui Hao & Yang Li & Kezhong Zhang, 2012. "The Effect of Leadership Transition on Government Expenditure: Evidence from China," Annals of Economics and Finance, Society for AEF, vol. 13(1), pages 91-112, May.
    12. Sena KIMM Gnangnon, 2020. "Export Product Diversification and Fiscal Space Volatility in Developing Countries: Exploring the Economic Growth Volatility Channel," Economics Bulletin, AccessEcon, vol. 40(3), pages 1837-1854.

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    More about this item

    Keywords

    Public expenditures; Volatility; Economic growth;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • I00 - Health, Education, and Welfare - - General - - - General
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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