Fiscal Policy  Expansion Essay

Journal of Public Economics 74 (1999) 171–190 www.elsevier.nl / identify / econbase

Fiscal plan and growth: evidence via OECD countries

Richard Kneller a, Eileen F. Bleaney b, 2., Norman Gemmell b a b

Countrywide Institute pertaining to Economic and Social Analysis, London, UK School of Economics, School of Nottingham, Nottingham, UK

Received 1 October 1998; received in revised kind 1 12 , 1998; acknowledged 1 December 1998

Subjective Is the facts consistent with the predictions of endogenous growth versions that the composition of taxation and public expenditure can impact the steady-state growth rate? Much prior research should be re-evaluated as it ignores the biases linked to incomplete specification of the govt budget constraint. We show these biases to be significant and, repairing for them, find strong support for the Barro unit (1990, Govt spending in a simple type of endogenous progress. Journal of Political Overall economy 98 (1), s103–117, to get a panel of twenty-two OECD countries, 1970–95. Specifically we find that (1) distortionary taxation reduces growth, whilst non-distortionary taxation will not; and (2) productive govt expenditure improves growth, although non-productive spending does not. © 1999 Elsevier Science S. A. Almost all rights set aside. Keywords: Progress; Government; Taxation JEL classification: H30; O40

1 . Launch Does the discuss of government spending in outcome, or the structure of expenses and income, affect the long-run growth price? According to the neoclassical growth models of Solow (1956) and Swan (1956), the solution is *Corresponding creator. Tel.: 144-115-951-5464; fax: 144-115-951-4159. E-mail address: michael. [email protected] ac. uk (M. Farreneheit. Bleaney) 0047-2727 / 99 / bucks – observe front subject © 1999 Elsevier Science S. A. All rights reserved. PII: S0047-2727( 99 )00022-5

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largely ‘no'. Even if the authorities could influence the rate of population development, for example by simply reducing infant mortality or perhaps encouraging child-bearing, this would not affect the long-run growth charge of per capita income. In these designs, tax and expenditure steps that influence the savings rate and also the incentive to invest in physical or human capital ultimately impact the equilibrium factor ratios rather than the steady-state expansion rate. In endogenous progress models, in comparison, investment in human and physical capital does impact the steady-state expansion rate, and therefore there is a lot more scope during these models for at least some aspects of tax and government expenses to play a role in the development process. Since the pioneering efforts of Barro (1990), California king and Rebelo (1990) and Lucas (1990), several paperwork have extended the research of taxation, public expenditure and progress, demonstrating several conditions under which fiscal variables may affect long-run growth (see, for instance , Jones ou al., 93; Stokey and Rebelo, 1995; Mendoza ain al., 1997). If the theory is reasonably clear, however , the empirical data is certainly not. As Stokey and Rebelo (1995, g. 519) condition, ‘‘recent quotes of the potential growth associated with tax reform vary wildly, ranging from no to ten percentage points''. In fact , no studies have been completely designed to evaluation the forecasts of endogenous growth versions with respect to the composition of both equally taxation and expenditure in the manner that we perform here (Devarajan et ing. (1996) do so for the expenditure side only). Furthermore, few analysts have recognised that incomplete studies (e. g. those that focus exclusively on one area of the budget and ignore the other) experience systematic biases to the variable estimates associated with the implicit financing assumptions. This time has been proven by Helms (1985), Mofidi and Rock (1990) and Miller and Russek (1993) for different data units. We explore the ramifications of this argument for the regression specification and show that, if this...

References: Atkinson, A. W., Stiglitz, J. E., 1980. Lectures on Public Economics, McGraw-Hill, London. Barro, L., 1990. Government spending within a simple type of endogenous growth. Journal of Political Economic climate 98 (1), s103–117.

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Barro, R., Sala-i-Martin, By., 1992. General public finance in models of economical growth. Report on Economic Studies 59 (4), 645–661. Legamo, R., Sala-i-Martin, X., 1995. Economic Growth, McGraw-Hill, New york city. Chamley, C., 1986. Optimum taxation of capital profits in general sense of balance with infinite lives. Econometrica 54 (3), 607–622. Devarajan, S., Swaroop, V., Zou, H., mil novecentos e noventa e seis. The make up of public expenditure and economic growth. Journal of Monetary Economics 37 (3), 313–344. Easterly, W., Rebelo, S., 1993. Fiscal coverage and financial growth. Diary of Monetary Economics thirty-two (3), 417–458. Folster, S., Henrekson, M., 1997. Progress and the public sector: a analyze of the authorities. IUI Doing work Paper Series No . 492. Glomm, G., Ravikumar, W., 1994. Community investment in infrastructure within a simple progress model. Record of Economical Dynamics and Control 18 (4), 1173–1187. Glomm, G., Ravikumar, N., 1997. Successful government expenditures and long-run growth. Diary of Economic Dynamics and Control twenty-one (1), 183–204. Helms, L., 1985. The effect of condition and local fees on economical growth: an occasion series-cross section approach. The Review of Economics and Statistics 67 (3), 574–582. Hsieh, At the., Lai, E., 1994. Authorities spending and economic growth: the G7 experience. Applied Economics 21 (5), 535–542. Jones, L., Manuelli, Ur., Rossi, S., 1993. Optimal taxation in models of endogenous growth. Diary of Politics Economy info (3), 485–519. Judd, T., 1985. For the performance of patents. Econometrica 53 (3), 567–585. King, R., Rebelo, S., 1990. Public plan and economical growth: Growing neoclassical ramifications. Journal of Political Economy 98 (1), s126–151. Kneller, R., Bleaney, M. Farreneheit., Gemmell, And., 1998. Progress, public plan and the federal government budget restriction: evidence by OECD countries. Discussion Newspaper no . 98 / 18, School of Economics, University of Nottingham. Kocherlakota, N., Yi, T. -M., 97. Is there endogenous long-run progress? Evidence from the US plus the UK. Log of Money Credit rating and Financial 29 (2), 235–262. Levine, R., Renelt, D., 1992. A sensitivity analysis of cross-country growth regressions. American Economic Review 82 (5), 942–963. Lucas, R., 1990. Supply-side economics: an synthetic review. Oxford Economic Papers 42 (2), 293–316. Mendoza, E., Milesi-Ferretti, G., Asea, P., 97. On the performance of duty policy in altering long-run growth: Harberger's superneutrality rumours. Journal of Public Economics 66 (1), 99–126. Burns, S., Russek, F., 1993. Fiscal buildings and financial growth: foreign evidence. Mimeo, University of Connecticut. Mofidi, A., Stone, J., 1990. Do express and local fees affect economic growth?. Overview of Economics and Statistics 72 (4), 686–691. Nehru, Versus., Swanson, At the., Dubey, A., 1995. A new database on human capital stock in developing and industrial countries: Sources, method and effects. Journal of Development Economics 46 (2), 379–401. Solow, R. Meters., 1956. A contribution for the theory of economic growth. Quarterly Log of Economics 71 (1), 65–94. Stokey, N., Rebelo, S., 1995. Growth effects of flat-rate income taxes. Journal of Political Economic system 103 (3), 510–550. Swan, T. T., 1956. Financial growth and capital accumulation. Economic Record 32 (3), 334–361.



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