ACADEMY OF ECONOMIC STUDIES BUCHAREST DOCTORAL SCHOOL OF FINANCE - BANKING DISSERTATION PAPER The Effects of Government Spending on Economic Growth Supervisor: Professor MOISA ALTAR MCs Student: STOIAN ANDREEA - MARIA June 2002

1. Empirical Evidence 2.Theoretical Background 3. Data and Methodology 4. Estimation Results 5.Conclusions

1. Empirical Evidence  exogenous growth  endogenous growth  government spending as flow (Ram, Barro, Engen & Skinner, Heitger)  public capital hypothesis (Aschauer, Batina, Pereira)  financing government spending (Devereux & Love)

Ram (1986)  cross-section  115 countries, (Summers-Heston database)  ,  LDC  individual regression (20 observations) Findings:  positive relationship  government played an important role during major shocks  70/115, positive relationship  1 case, negative relationship

Barro (1989)  endogenous growth  government spending flow  cross -section, 72 countries, (Summers-Heston database)  excepting major oil-exporting countries Findings:  positive relationship: social transfers, government spending on infrastructure  negative relationship: public consumption spending  not significant relationship: national defense, education  inverse causality (Wagner’s Law): social transfers (+), education (+), public consumption government spending (-)

Engen and Skinner (1992)  taxation and government spending  107 countries, (Summers-Heston database)  negative relationship government spending - economic growth Heitger (2001)  neoclassical model  21 OECD countries,  public consumption, transfers (interest payments, subsidies), public investment  negative relationship: economic growth, investment  not-significant human capital

Aschauer (2001)  public capital hypothesis  ”core” public goods vs. “others”  48 american states,  positive relationship  more significance for “others” Pereira (2001)  public capital hypothesis  12 OECD countries  VAR/VECM  cointegration: Belgium, Canada, Germany, Sweden  no-cointegration: 8  observations

Aschauer (2001)  initial investments: bond issue  maintenance of capital: taxes  negative relationship Devereux & Love (1995)  government spending financed by taxes  temporary or permanent shock: decreasing growth rate

2.Theoretical Background Ihori & Kondo, 2001

3.Data and Methodology

4.Estimation Results  1 st Step: simple OLS  2 nd Step: “exogeneity” (Edelberg, Eichenbaum & Fisher, 1998)  3 rd Step: VECM

DHUMAN=f(DHUMAN(-1),DHUMAN(-2),DCONSUM,DCONSUM(-1),DINVEST,DINCOME,SEAS)+ε t

DINVEST=f(DINVEST(-1),DINVEST(-2),DCONSUM,DCONSUM(-1),DCONSUM(-2),SEAS)+ε t

5.Conclusions  industrial production reacts on shocks on human capital government spending  industrial output reacts on shocks on government spending on investments  the effects of HCGS are more significant than those of GSI  long-run equilibrium relationship  GSC, GSI negative effects on industrial production  HCGS positive effects on industrial production  industrial production human capital intensive

Shortcomings:  cross-section analysis (not my favourite)  monthly data  ”exogeneity” of government spending on consumption  first-difference stationarity: coefficients from OLS  financing government spending

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