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Essays on the Relationship between Government Expenditure and Macroeconomic Performance Open Access

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This dissertation studies the relationship between government expenditure and economic performance. The first essay investigates a nonlinear relationship between government spending and macroeconomic performance by estimating a threshold model that relates real GDP growth to three measures of government spending: government consumption, government investment, and total government expenditure as share to GDP. Using quarterly data for five OECD countries from 1970 through 2008, Hansen's (1996, 1999, and 2000) method is applied to test for the presence of threshold effects and to estimate the threshold values.The main findings suggest that there is strong evidence of a nonlinear relationship between government spending and macroeconomic performance for all three measures of government spending in five OECD countries. The results also indicate the importance of compositional effects when examining government spending. The impact on government investment on macroeconomic performance is quite different from that for government consumption. Finally, there appears to be large country-specific variations in terms of the pattern of results. The second essay investigates the impacts of fiscal policy on economic activity at both economic growth and business cycle frequencies for Latin American, East Asian, and European countries. Using a panel data set for 1970-2006 with annual frequency, I estimate both short-and long-run effects of government spending on economic growth through a pooled mean group estimator, introduced by Pesaran, Shin, and Smith (1999). The main results suggest that expansionary fiscal policy on infrastructure spending is favorable to real GDP per capita growth in the short-run. The long-run impacts of energy spending on real GDP per capita growth are also positive, while those of transport and communications spending are strongly negative. On the other hand, social spending appears to have a long-run positive relation with economic growth. However, the short-run relationship between education spending and real GDP per capita growth is negative. The short-run impacts of health spending are positive as long as an increase in the share of health spending is adjusted by a decrease in other spending shares. In addition, increasing government consumption expenditure is negatively correlated to economic growth both in the long-and short-runs.

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