Output Growth and Unexpected Government Expenditures

Escobari, Diego and Mollick, André Varella (2013): Output Growth and Unexpected Government Expenditures. Forthcoming in: The B.E. Journal of Macroeconomics

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Dynamic Panels, Economic Growth, Expected and Unexpected Government Expenditures, Globalization.
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies

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