1. 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

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

3. 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)

4. Ram (1986)  cross-section  115 countries, 1960-1980 (Summers-Heston database)  1960-1970, 1970-1980  LDC  individual regression (20 observations) Findings:  positive relationship  government played an important role during major shocks  70/115, positive relationship  1 case, negative relationship

5. Barro (1989)  endogenous growth  government spending flow  cross -section, 72 countries,1960-1985 (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 (-)

6. Engen and Skinner (1992)  taxation and government spending  107 countries, 1970-1985 (Summers-Heston database)  negative relationship government spending - economic growth Heitger (2001)  neoclassical model  21 OECD countries, 1960-2000  public consumption, transfers (interest payments, subsidies), public investment  negative relationship: economic growth, investment  not-significant human capital

7. Aschauer (2001)  public capital hypothesis  ”core” public goods vs. “others”  48 american states, 1970-1990  positive relationship  more significance for “others” Pereira (2001)  public capital hypothesis  12 OECD countries  VAR/VECM  cointegration: Belgium, Canada, Germany, Sweden  no-cointegration: 8  24-34 observations

8. 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

9. 2.Theoretical Background Ihori & Kondo, 2001

11. 3.Data and Methodology

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

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

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

21. 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

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

23. References Aschauer, D.A. (2001), "Output and Employment Effects of Public Capital", Public Finance & Management,1,2, pp.135-160 Barro, R.J. (1988a), "Government Spending in a Simple Model of Endogenous Growth", NBER Working Paper Series (1989b), "A Coss - Countru Study of Growth, Saving and Government", NBER Working Paper Series Barro, R.J. and X. Sala-I-Martin (1995), "Economic Growth", The MIT Press, pp.152-161,330-462 Batina, R.G. (2001), "The Effects of Public Capital on the Economy", Public Finance & Management, 1,2, pp.113-134 Brock W.A. and S.N.Durlauf, "Growth Economics and Reality", NBER Working Paper Series Carr, J.L. (1989), "Government Size and Economic Growth: A New Framework and Some Evidence from Cross-Section and Time Series Data: Comment", American Economic Review, 79, pp.267-271 Cullis, J. and P.Jones (1998), "Public Finance and Public Choice", Oxford University Press, Oxford, 352-371 Devereux, M.B. and D.R.F.Love (1995), "The Dymanic Effects of Government Spending Policies in a Two - Sector Endogenous Growth Model", Journal of Money, Credit, and Banking, 27, pp.232- 256 Edelberg W., M.Eichenbaum and J.D.M.Fisher (1998), "Understanding the Effects of a Shock to Government Purchases", NBER Working Series Enders W., "Applied Econometric Time Series", John Wiley & Sons, INC Engen E.M. and J.Skinner (1992), "Fiscal Policy and Economic Growth", NBER Working Paper Series Fölster S. and M.Henrekson, (1998a),"Growth and Public Sector: A Critique of the Critics", WOPEC Working Paper Series (2000b), "Growth Effects of Government Expenditure and Taxation in Rich Countries", WOPEC Working Paper Series Greene W.H. (2000), "Econometric Analysis", Prentice Hall International, Inc Hamilton J.D. (1994), "Time Series Analysis", Princeton University Press, Princeton, New Jersey Heitger B. (2001), "The Scope of Government and Its Impact on Economic Growth in OECD Countries", WOPEC Working Paper Series Ihori T. and H.Kondo (2001), "The Efficiency of Disaggregate Public Capital Provision in Japan", Public Finance & Management, 1,2, pp.161-182 Palivos T. and C.K.Zip, "Government Expenditure Financing in an Endogenous Growth Model: A Comparison", Journal of Money, Credit, and Banking, 27, pp.1159-1178 Pereira A.M. (2001), "Public Investment and Private Sector Performance - International Evidence", Public Finance & Management, 1,2, pp.261-277 Ram R. (1986), "Government Size and Economic Growth: A New Framework and Some Evidence from Cross-Section and Time Series Data", American Economic Review, 76, pp.291-203 Rubio -Oscar B. (2000), "A Further Generalization of the Solow Growth Model: The Role of the Public Sector", Economics Letters, 68, pp.79-84 National Bank of Romania, "Monthly Report", 1999-2001 National Bank of Romania, "Annual Report", 1991-2001