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Oxford Economic Papers Advance Access originally published online on December 22, 2005
Oxford Economic Papers 2006 58(1):123-136; doi:10.1093/oep/gpi045
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© Oxford University Press 2005; All rights reserved

Economic growth with an optimal public spending composition

Been-Lon Chen

Institute of Economics, Academia Sinica 128 Academia Rd., Section 2. Taipei, Taiwan;

Correspondence: e-mail: bchen{at}econ.sinica.edu.tw

This paper uses a one-sector, endogenous growth model to study optimal composition between public investment and consumption in government expenditure and its relationships with economic growth. Assuming a benevolent government which maximizes a representative household's lifetime utilities, the paper determines the unique, interior public investment share in government's budgets, which is determined by policy and structural parameters, and finds that the conventional determinants of economic growth now generate stronger growth effects, via their indirect impacts upon optimal public spending composition. The effects emerge from raising the marginal utility of private consumption, relative to the marginal utility of public consumption, thereby inducing public investment and increasing economic growth. Our quantitative results suggest that the growth effect is sizable. The large growth effect via optimal public investment in our model has implications for East Asian economic growth miracles where public investment share and economic growth are both higher than other area's countries.

Key Words: JEL classification: H41 • H54 • O41


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S. Ghosh and A. Gregoriou
The composition of government spending and growth: is current or capital spending better?
Oxf. Econ. Pap., July 1, 2008; 60(3): 484 - 516.
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