Government Size and the Composition of Public Spending in a Neoclassical Growth Model

TitleGovernment Size and the Composition of Public Spending in a Neoclassical Growth Model
Publication TypeWorking Paper
Year of Publication2007
AuthorsOA. Carboni, G. Medda
Number2007_01
Keywordsfiscal policy, neoclassical and augmented growth models, public spending composition
Abstract

This paper develops a non-linear theoretical relationship between public spending and economic growth. The model identifies the “optimal” size of government and the “optimal” composition of government spending. Given the size of the government, different allocations of public resources lead to different growth rates in the transition dynamics, depending on their elasticity. We argue that neglecting the hypothesis of non-linearity and the different impact different kinds of public spending have on economic performance results in models which suffer from mis-specification. Traditional linear regression analysis may thus be biased

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