Home Business & Economics Output growth and unexpected government expenditures
Article
Licensed
Unlicensed Requires Authentication

Output growth and unexpected government expenditures

  • Diego Escobari EMAIL logo and André Varella Mollick
Published/Copyright: September 5, 2013
The B.E. Journal of Macroeconomics
From the journal The B.E. Journal of Macroeconomics Volume 13 Issue 1

Abstract

This paper takes into account the dynamic feedback between government expenditures and output in a model that separates the effects of expected and unexpected government expenditures on output. We allow for standard determinants based on Solow’s growth model, as well as financial globalization and trade openness measures for a sample of 56 industrial and emerging market economies over the 1970–2004 period. We find that unanticipated government expenditures have negative and significant effects on output growth, with higher effects in developed economies. Along with savings responses, we interpret these results based on how fiscal policy reacts to business cycles. Anticipated government expenditures have negative – but smaller effects – on output growth. These results are very robust to a recursive treatment of expectations, which reinforces the role of new information in an increasingly integrated world economy.

Keywords: dynamic panels; economic growth; expected and unexpected government expenditures; globalization; JEL Codes: E32; E62; F43
Corresponding author: Diego Escobari, Department of Economics and Finance, University of Texas – Pan American, 1201 W. University Dr., Edinburg, TX 78539-2999, USA, Tel.: +1-956-665-3366, Fax: +1-956-665-2687, e-mail:
  1. 1

    Robert Barro, Government Spending is no Free Lunch, The Wall Street Journal, Jan 22, 2009. He makes the expectations channel clear: “There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases. For one thing, people would expect the added wartime outlays to be partly temporary (so that consumer demand would not fall a lot). Second, the use of the military draft in wartime has a direct, coercive effect on total employment. Finally, the US economy was already growing rapidly after 1933 (aside from the 1938 recession), and it is probably unfair to ascribe all of the rapid GDP growth from 1941 to 1945 to the added military outlays. In any event, when I attempted to estimate directly the multiplier associated with peacetime government purchases, I got a number insignificantly different from zero.”

  2. 2

    Robert Barro, The Stimulus Evidence 1 Year On, The Wall Street Journal, Feb 23, 2010.

  3. 3

    In time series, Blanchard and Perotti (2002) examine the effects of changes in government spending and taxes on output. Employing a three-variable VAR (with taxes, spending, and quarterly real per capita GDP) for the postwar US, they find in all specifications that output responds positively to a spending shock, although the persistence of the impulse responses changes depending on whether a deterministic or stochastic trend is assumed.

  4. 4

    The link between government size and openness has been extensively studied as well. Rodrik (1998) finds a positive relationship between trade openness and the size of government, and Alesina and Wacziarg (1998) document a negative covariation of country size with trade openness and with the ratio of government expenditures to output. Ram (2009) uses 41-year panel data covering the period 1960–2000 for 154 countries to find support for the direct relationship in Rodrik (1998), while Benarroch and Pandey (2008) find the opposite to Rodrik (1998).

  5. 5

    In an innovative approach to deal with the endogeneity of cyclicality of fiscal policy Svec and Kondo (2012) use the stringency of balance budget rules across US states as instruments in a cross-section growth regression. While in their case the US state level dataset extends until 2009, they limit the analysis to 1977–1997 due to changing variable definitions. In our dataset for countries of the world, there is a surprisingly lower level of (uniform) data availability for tax revenues, as can be checked at http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS. This constraint implies that tax revenues data would only be available from 1990 onwards (and not for all countries studied herein), which prevents us from using tax revenues in the equation for government expenditures below.

  6. 6

    Bun and Kiviet (2006) formalize the feedback mechanism to analyze the finite sample behavior of particular least squares and method of moments estimators. A similar characterization is used in Blundell, Bond, and Windmeijer (2000) in some Monte Carlo simulations.

  7. 7

    Tortorice (2012) finds that while households’ expectations can depart dramatically from VAR forecasts, professional forecasters’ expectations do not depart much.

  8. 8

    Equation (4) follows model 4 in Pagan (1984) and accounts for the estimation error associated with the first-step estimation, (git–E[git]), explicitly by including it in the estimated equation. More recent implementations of Model 4 in Pagan appear in Abowd, Kramarz, and Margolis (1999) and Escobari (2012).

  9. 9

    Some panel studies (e.g., Furceri and Mourougane 2012) use the Kalman filter to obtain structural unemployment or univariate filters (such as the Hodrick-Prescott filter) to smooth variables. In this paper we follow Islam (1995) and we do not use those filters.

  10. 10

    Analogous moment conditions are used to estimate (α, β, θ) and (α, βE, βU, θ) in Equations (1) and (4), respectively.

  11. 11

    To illustrate the difference between predetermined and endogenous consider the instrument list in the specification in column 4, where git and sit are treated as weakly exogenous and nit is treated as strictly exogenous. Instruments for the first-differenced equations are Δnit, and the first and further lags of yi,t–1, git, and sit. The instruments in the levels equations are Δyi,t–1, Δgit, and Δsit. Treating git as potentially endogenous rather than predetermined invalidates gi,t–1 and Δgit as instruments. Hence, the instruments formed with git have one additional lag when compared to the ones based on the predetermined git.

  12. 12

    A similar test, but for the expected component of git, found no difference between developed and emerging economies.

  13. 13

    This can be accomplished by differencing (1) and re-estimating the equation with output growth as the dependent variable on lagged GDP and current government expenditures and controls. In the same way, we can regress government expenditures on GDP growth and controls for a variant of (2).

We thank two anonymous referees for providing helpful comments to improve the paper. The usual disclaimer applies.

References

Abel, A., B. Bernanke, and D. Croushore. 2011. Macroeconomics. 7th Ed. Boston, MA: Pearson, Addison-Wesley.Search in Google Scholar

Abowd, J. M., F. Kramarz, and D. N. Margolis. 1999. “High Wage Workers and High Wage Firms.” Econometrica 67: 251–333.10.1111/1468-0262.00020Search in Google Scholar

Adam, C. S., and D. Bevan. 2005. “Fiscal Deficits and Growth in Developing Countries.” Journal of Public Economics 89: 571–597.10.1016/j.jpubeco.2004.02.006Search in Google Scholar

Afonso, A., and J. T. Jalles. 2011. “Economic Performance and Government Size.” European Central Bank Working Paper Series No. 1399, November.10.2139/ssrn.1950570Search in Google Scholar

Aizenman, J. 2008. “On the Hidden Links between Financial and Opening.” Journal of International Money and Finance 27: 372–386.10.1016/j.jimonfin.2008.01.002Search in Google Scholar

Alesina, A., and R. Wacziarg. 1998. “Openness, Country Size, and Government.” Journal of Public Economics 69: 305–321.10.1016/S0047-2727(98)00010-3Search in Google Scholar

Arellano, M., and S. Bond. 1991. “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations.” Review of Economic Studies 58: 277–297.10.2307/2297968Search in Google Scholar

Arellano, M. and O. Bover. 1995. “Another Look at the Instrumental Variable Estimation of Error-components Models.” Journal of Econometrics 68: 29–51.10.1016/0304-4076(94)01642-DSearch in Google Scholar

Baltagi, B., P. Demetriades, and S. H. Law. 2009. “Financial Development and Openness: Evidence from Panel Data.” Journal of Development Economics 89 (2): 285–296.10.1016/j.jdeveco.2008.06.006Search in Google Scholar

Barro, R. J. 1977. “Unanticipated Money Growth and Unemployment in the United States.” American Economic Review 67 (2): 101–115.Search in Google Scholar

Barro, R. J. 1990. “Government Spending in as Simple Model of Endogenous Growth.” Journal of Political Economy 98 (5): S103–S125.10.1086/261726Search in Google Scholar

Barro, R. J. 1991. “Economic Growth in a Cross Section of Countries.” Quarterly Journal of Economics 106: 407–443.10.2307/2937943Search in Google Scholar

Barro, R. J. 2010. “The Stimulus Evidence One Year On.” The Wall Street Journal,Feb 23.Search in Google Scholar

Barro, R. J., and C. Redlick. 2011. “Macroeconomic Effects from Government Purchases and Taxes.” Quarterly Journal of Economics 126: 51–102.10.1093/qje/qjq002Search in Google Scholar

Benarroch, M., and M. Pandey. 2008. “Trade Openness and Government Size.” Economics Letters 101 (3): 157–159.10.1016/j.econlet.2008.06.016Search in Google Scholar

Bergh, A. and M. Henrekson. 2011. “Government Size and Growth: A Survey and Interpretation of the Evidence.” Journal of Economic Surveys 25 (5): 872–897.10.1111/j.1467-6419.2011.00697.xSearch in Google Scholar

Blanchard, O., and R. Perotti. 2002. “An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output.” Quarterly Journal of Economics 117 (4): 1329–1368.10.1162/003355302320935043Search in Google Scholar

Blundell, R. W., and S. Bond. 1998. “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models.” Journal of Econometrics 87: 115–143.10.1016/S0304-4076(98)00009-8Search in Google Scholar

Blundell, R. W., S. Bond, and F. Windmeijer. 2000. “Estimation in Dynamic Panel Data Models: Improving on the Performance of the Standard GMM Estimator.” In Nonstationary Panels, Panel Cointegration and Dynamic Panels, edited by B. Baltagi, 53–91. Vol. 15 of Advances in Econometrics. Amsterdam: JAI Press, Elsevier Science.10.1016/S0731-9053(00)15003-0Search in Google Scholar

Bun, M. and J. Kiviet. 2006. “The Effects of Dynamic Feedbacks on LS and MM Estimator Accuracy in Panel Data Models.” Journal of Econometrics 132: 409–444.10.1016/j.jeconom.2005.02.006Search in Google Scholar

Byrne, J., N. Fiess, and R. MacDonald. 2011. “The Global Dimensions of Fiscal Sustainability.” Journal of Macroeconomics 33: 137–150.10.1016/j.jmacro.2011.01.002Search in Google Scholar

Cabral, R. and A. V. Mollick. 2012. “Output Growth Convergence with Openness and Government Size in a Global World.” International Trade Journal 26: 201–222.10.1080/08853908.2012.682024Search in Google Scholar

Chang, R., L. Kaltani, and N. Loayza. 2008. “Openness can be Good for Growth: The Role of Policy Complementarities.” Journal of Development Economics 90 (1): 33–49.10.1016/j.jdeveco.2008.06.011Search in Google Scholar

Edison, H., R. Levine, L. Ricci, and T. Sløk. 2002. “International Financial Integration and Economic Growth.” Journal of International Money and Finance 21: 749–776.10.1016/S0261-5606(02)00021-9Search in Google Scholar

Edwards, S. 1998. “Openness, Productivity and Growth: What do we Really Know?” Economic Journal 108 (447): 383–398.Search in Google Scholar

Escobari, D. 2012. “Dynamic Pricing, Advance Sales, and Aggregate Demand Learning in Airlines.” Journal of Industrial Economics 60: 697–724.10.1111/joie.12004Search in Google Scholar

Forni, L., L. Monteforte, and L. Sessa. 2009. “The General Equilibrium Effects of Fiscal Policy: Estimates for the Euro Area.” Journal of Public Economics 93: 559–585.10.1016/j.jpubeco.2008.09.010Search in Google Scholar

Furceri, D., and A. Mourougane. 2012. “The Effect of Financial Crises on Potential Output: New Empirical Evidence from OECD Countries.” Journal of Macroeconomics 34: 822–832.10.1016/j.jmacro.2012.05.010Search in Google Scholar

Giavazzi, F., T. Japelli, and M. Pagano. 2000. “Searching for Non-Linear Effects of Fiscal Policy: Evidence from Industrial and Developing Countries.” European Economic Review 44: 1259–1289.10.1016/S0014-2921(00)00038-6Search in Google Scholar

Gourinchas, P. O. and O. Jeanne. 2006. “The Elusive Gains from International Financial Integration.” Review of Economic Studies 73: 715–741.10.1111/j.1467-937X.2006.00393.xSearch in Google Scholar

Hauk Jr., W., and R. Wacziarg. 2009. “A Monte Carlo Study of Growth Regressions.” Journal of Economic Growth 14: 103–147.10.1007/s10887-009-9040-3Search in Google Scholar

Holtz-Eakin, D., W. Newey, and H. Rosen. 1988. “Estimating Vector Autoregressions with Panel Data.” Econometrica 56: 1371–1395.10.2307/1913103Search in Google Scholar

Islam, N. 1995. “Growth Empirics: A Panel Data Approach.” Quarterly Journal of Economics 110: 1127–1170.10.2307/2946651Search in Google Scholar

Kneller, R., M. Bleaney, and N. Gemmell. 1999. “Fiscal Policy and Growth: Evidence from OECD Countries.” Journal of Public Economics 74: 171–190.10.1016/S0047-2727(99)00022-5Search in Google Scholar

Lane, P., and G. M. Milesi-Ferretti. 2007. “The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities.” Journal of International Economics 73: 223–250.10.1016/j.jinteco.2007.02.003Search in Google Scholar

Levine, R., and D. Renelt. 1992. “A Sensitivity Analysis of Cross-country Growth Regressions.” American Economic Review 82: 943–963.Search in Google Scholar

López-Villavicencio, A., and V. Mignon. 2011. “On the Impact of Inflation on Output Growth: Does the Level of Inflation Matter?” Journal of Macroeconomics 33: 455–464.10.1016/j.jmacro.2011.02.003Search in Google Scholar

Mankiw, G., D. Romer, and D. Weil. 1992. “A Contribution to the Empirics of Economic Growth.” Quarterly Journal of Economics 107 (2): 407–437.10.2307/2118477Search in Google Scholar

Mishkin, F. 2009. “Globalization and Economic Development.” Journal of Development Economics 89 (2): 164–169.10.1016/j.jdeveco.2007.11.004Search in Google Scholar

Mollick, A., and R. Cabral. 2011. “Government Size and Output Growth: The Effects of “Averaging out”.” Kyklos 64 (1): 122–137.10.1111/j.1467-6435.2010.00498.xSearch in Google Scholar

Mueller, D., and T. Stratmann. 2003. “The Economic Effects of Democratic Participation.” Journal of Public Economics 87: 2129–2155.10.1016/S0047-2727(02)00046-4Search in Google Scholar

Pagan, A. 1984. “Econometric Issues in the Analysis of Regressions with Generated Regressors.” International Economic Review 25: 221–247.10.2307/2648877Search in Google Scholar

Perotti, R. 1999. “Fiscal Policy in Good Times and Bad.” Quarterly Journal of Economics 114 (4): 1399–1436.10.1162/003355399556304Search in Google Scholar

Poterba, J. 1988. “Are Consumers Forward Looking? Evidence from Fiscal Experiments.” American Economic Review Papers and Proceedings 78: 413–418.Search in Google Scholar

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: 191–203.Search in Google Scholar

Ram, R. 2009. “Openness, Country Size, and Government Size: Additional Evidence from a Large Cross-Country Panel.” Journal of Public Economics 93 (1–2): 213–218.Search in Google Scholar

Ramey, V. 2011. “Can Government Purchases Stimulate the Economy?” Journal of Economic Literature 49: 673–685.10.1257/jel.49.3.673Search in Google Scholar

Roodman, D. 2009a. “A Note on the Theme of Too Many Instruments.” Oxford Bulletin of Economics and Statistics 71: 135–158.10.1111/j.1468-0084.2008.00542.xSearch in Google Scholar

Roodman, D. 2009b. “How to do xtabond2: An Introduction to Difference and System GMM in Stata.” The Stata Journal 9: 86–136.10.1177/1536867X0900900106Search in Google Scholar

Rodrik, D. 1998. “Why do More Open Economies Have Bigger Governments?” Journal of Political Economy 106: 997–1032.10.1086/250038Search in Google Scholar

Solow, R. M. 1956. “A Contribution to the Theory of Economic Growth.” Quarterly Journal of Economics 70 (1): 65–94.10.2307/1884513Search in Google Scholar

Svec J. and A. Kondo. 2012. “Fiscal Policy Cyclicality and Growth within the US States.” The B.E. Journal of Macroeconomics 12 (2) (Advances), Article 2.Search in Google Scholar

Swaleheen, M. 2011. “Economic Growth with Endogenous Corruption: An Empirical Study.” Public Choice 146: 23–41.10.1007/s11127-009-9581-1Search in Google Scholar

Tagkalakis, A. 2008. “The Effects of Fiscal Policy on Consumption Recessions and Expansions.” Journal of Public Economics 92: 1486–1508.10.1016/j.jpubeco.2007.11.007Search in Google Scholar

Tortorice, D. L. 2012. “Unemployment Expectations and the Business Cycle.” The B.E. Journal of Macroeconomics 12 (1) (Topics), Article 1.Search in Google Scholar

Woo, J. 2011. “Growth, Income Distribution, and Fiscal Policy Volatility.” Journal of Development Economics 96: 289–313.10.1016/j.jdeveco.2010.10.002Search in Google Scholar

Published Online: 2013-09-05
Published in Print: 2013-01-01

©2013 by Walter de Gruyter Berlin Boston

Articles in the same Issue

  1. Masthead
  2. Masthead
  3. Advances
  4. How have global shocks impacted the real effective exchange rates of individual euro area countries since the euro’s creation?
  5. Employment by age, education, and economic growth: effects of fiscal policy composition in general equilibrium
  6. Overeducation and skill-biased technical change
  7. Strategic wage bargaining, labor market volatility, and persistence
  8. Households’ uncertainty about Medicare policy
  9. Contributions
  10. Deconstructing shocks and persistence in OECD real exchange rates1)
  11. A contribution to the empirics of welfare growth
  12. Development accounting with wedges: the experience of six European countries
  13. Implementation cycles, growth and the labor market
  14. International technology adoption, R&D, and productivity growth
  15. Bequest taxes, donations, and house prices
  16. Business cycle accounting of the BRIC economies
  17. Privately optimal severance pay
  18. Small business loan guarantees as insurance against aggregate risks
  19. Output growth and unexpected government expenditures
  20. International business cycles and remittance flows
  21. Effects of productivity shocks on hours worked: UK evidence
  22. A prior predictive analysis of the effects of Loss Aversion/Narrow Framing in a macroeconomic model for asset pricing
  23. Exchange rate pass-through and fiscal multipliers
  24. Credit demand, credit supply, and economic activity
  25. Distortions, structural transformation and the Europe-US income gap
  26. Monetary policy shocks and real commodity prices
  27. Topics
  28. News-driven international business cycles
  29. Business cycle dynamics across the US states
  30. Required reserves as a credit policy tool
  31. The macroeconomic effects of the 35-h workweek regulation in France
  32. Productivity and resource misallocation in Latin America1)
  33. Information and communication technologies over the business cycle
  34. In search of lost time: the neoclassical synthesis
  35. Divorce laws and divorce rate in the US
  36. Is the “Great Recession” really so different from the past?
  37. Monetary business cycle accounting for Sweden
https://doi.org/10.1515/bejm-2012-0072
Keywords for this article
dynamic panels; economic growth; expected and unexpected government expenditures; globalization; JEL Codes: E32; E62; F43

Articles in the same Issue

  1. Masthead
  2. Masthead
  3. Advances
  4. How have global shocks impacted the real effective exchange rates of individual euro area countries since the euro’s creation?
  5. Employment by age, education, and economic growth: effects of fiscal policy composition in general equilibrium
  6. Overeducation and skill-biased technical change
  7. Strategic wage bargaining, labor market volatility, and persistence
  8. Households’ uncertainty about Medicare policy
  9. Contributions
  10. Deconstructing shocks and persistence in OECD real exchange rates1)
  11. A contribution to the empirics of welfare growth
  12. Development accounting with wedges: the experience of six European countries
  13. Implementation cycles, growth and the labor market
  14. International technology adoption, R&D, and productivity growth
  15. Bequest taxes, donations, and house prices
  16. Business cycle accounting of the BRIC economies
  17. Privately optimal severance pay
  18. Small business loan guarantees as insurance against aggregate risks
  19. Output growth and unexpected government expenditures
  20. International business cycles and remittance flows
  21. Effects of productivity shocks on hours worked: UK evidence
  22. A prior predictive analysis of the effects of Loss Aversion/Narrow Framing in a macroeconomic model for asset pricing
  23. Exchange rate pass-through and fiscal multipliers
  24. Credit demand, credit supply, and economic activity
  25. Distortions, structural transformation and the Europe-US income gap
  26. Monetary policy shocks and real commodity prices
  27. Topics
  28. News-driven international business cycles
  29. Business cycle dynamics across the US states
  30. Required reserves as a credit policy tool
  31. The macroeconomic effects of the 35-h workweek regulation in France
  32. Productivity and resource misallocation in Latin America1)
  33. Information and communication technologies over the business cycle
  34. In search of lost time: the neoclassical synthesis
  35. Divorce laws and divorce rate in the US
  36. Is the “Great Recession” really so different from the past?
  37. Monetary business cycle accounting for Sweden
Sign up now to receive a 20% welcome discount
Institutional Access
How does access work?
Have an idea on how to improve our website?
Please write us.
© 2025 De Gruyter Brill
Downloaded on 31.12.2025 from https://www.degruyterbrill.com/document/doi/10.1515/bejm-2012-0072/pdf
Scroll to top button