Assessing the relationship between public spending and economic growth through an endogenous growth model

Abstract

Public spending is a part of the fiscal policy and one of the government’s main tools to implement its economic policy. With government spending still on the rise in many economies, and the different economic growth levels, especially in low and middle economies, the debate on whether government spending has a positive, negative or neutral impact on economic growth is still raging nowadays. So, in this analysis, we attempt to contribute to this issue by shedding light on this relationship in the case of low, middle, and high-income countries. In so doing, we extend the previous work of Devarajan et al. (1996) and Chu et al. (2020) by considering the nonlinear relationship between disaggregated public spending and economic growth. We also pay attention to the role of public spending on environmental protection, political stability, control of corruption, and the 2008 financial crisis, on economic growth. To reach our objectives, we examine 13 high-income countries and 22 low to middle-income countries for the period 1993–2018 through four estimations techniques: the fixed-effects approach; the pooled standard errors Driscoll-Kraay (1998), the panel feasible generalized least squares, and the difference GMM with orthogonal deviations.