Bharat R. Kolluri

Government expenditure and economic growth: evidence from G7 countries

This paper examines Wagners Law of Public Expenditure, which emphasizes economic growth as the fundamental determinant of public sector growth, using time series data drawn from the G7 industrialized countries over the sample period 1960 1993. It presents evidence on both the short- and long-run effects of growth in national income on government expenditure by resorting to recent developments in the theory of cointegrated processes. An attempt is also made in this study to examine if Wagners Law holds between certain key components of government expenditure and income.

Budget deficits and short-term real interest rate forecasting*

A number of propositions on the real interest rate determination, including the effects of budget deficit, are tested in this paper. In addition, some forecasts of the real interest rate based on a best-performing forecasting model are presented. Unlike the commonly held belief, our empirical analysis shows a depressing effect of an increase in the budget deficit on the short-term real rate of interest. The coefficient instability analysis confirms a structural break in the real interest rate model around 1979–1980. The forecasting model has been properly adjusted for this structural instability.

Deficit spending, money, and inflation: Some international empirical evidence

Abstract An attempt is made, in this study, to examine the monetarist propositions regarding the effects of budget deficits on money growth and inflation for ten industrialized countries. To this end, a two-equation econometric model consisting of the money supply growth and inflation equations has been specified and estimated. Based on the results, it is concluded that, in general, the government budget deficit is not a determinant of money supply growth or of inflation (directly or indirectly). The U.S. is an exception with some statistical evidence of direct and indirect effects of the budget deficit on inflation.

The Impact of Budget Deficits on Real Interest Rates: An International Empirical Investigation

In this study, an attempt is made to asses the empirical relationship between the short-term real rate of interest and government budget deficit for five industrialized countries during the period of 1965Q1–1985Q4. Contrary to the conclusions reported earlier by some, the results do not support a statistically significant relationship between budget deficit spending and the real interest rate. Alternative estimations of the basic model with money supply and government spending as other determinants of the real interest rate did not alter the fundamental conclusion reached. [310]

A test of the convergence hypothesis: the OECD experience, 1950–1990☆

Abstract The convergence hypothesis maintains that an economy whose productivity lags behind other economies has a potential to grow faster. We introduce a procedure for testing this hypothesis and apply it to 24 OECD countries for the period 1950–1990. Our approach is an attempt to capture the economics of the convergence hypothesis, while avoiding the problems associated with two popular tests of convergence, namely β -convergence and σ -convergence. An application of an ARMA process to our sample data finds only modest support for the convergence hypothesis in the OECD during the postwar era. Patterns of investment, government consumption, and exports largely explain the observed convergence in the OECD.

Asymmetries in the conditional relation of government expenditure and economic growth

Previous studies on the relationship between government expenditure and economic growth have, invariably, aggregated periods of strong and weak GDP growth and reported a single government expenditure response coefficient estimate. We argue that traditional test specifications of this relationship suffer from aggregation (or omitted variables) biases by failing to distinguish between diverse economic growth experiences and their impact on government expenditure. We reexamine the evidence concerning Wagners Law using a proposed conditional test specification that is capable of: (a) separating periods of strong and weak economic growth, (b) accommodating possible asymmetries in the marginal responses of government expenditure to variations in economic growth and (c) distinguishing between positive and negative asymmetries in such responses. We present evidence showing that: (a) the majority of government expenditure responses tend to occur during periods of an economic slowdown characterized by GDP growth that is below trend-growth; and (b) there is little evidence suggesting that government expenditure increases markedly during periods of an economic expansion when GDP growth is at/above trend-growth. Results from several tests of hypotheses also corroborate these findings. When we aggregate response coefficients across periods of above trend-growth and below trend-growth, we obtain an elastic aggregate response coefficient for OECD countries in line with Wagners proposition. However, the evidence seems less forthcoming for EU economies. Nonetheless, the estimated cumulative response coefficient from our conditional asymmetric specification exceeds the estimated response coefficient from a traditional symmetric test specification which appears biased against finding support for Wagners proposition due to omission of important directional asymmetry variables from the estimating equation.

Determinants of household saving in the G-7 countries: recent evidence

This paper employs data from the last four decades to analyse major determinants of household saving for the Group of Seven (G-7) nations. Particular attention is paid to the effects of interest rates, government saving, and social security contributions. Regression analysis is used to control for the effects of both the level and changes in income per capita and inflation.

Social security and household wealth accumulation: Refined microeconometric evidence

This study examines the relationship between social security wealth and fungible wealth using relatively recent micro data. The authors find that a ceteris paribus increase in social security wealth has no effect on fungible wealth, suggesting that Ricardian equivalence holds. Of the individual wealth categories comprising fungible wealth, only pension wealth is negatively and significantly affected by an increase in social security wealth and, if some of this pension wealth is not fully funded, Ricardian equivalence will not hold. The authors conclude, therefore, that the social security system might adversely affect capital accumulation but not necessarily to the degree suggested by others. Copyright 1993 by MIT Press.

An Empirical Analysis of The Effects of Government Spending on Capital Investment: Evidence from O.E.C.D. Countries.

This paper focuses on the possible “direct” effect in increased government size on fixed capital formation. That is, we hypothesize that as government increases its consumption as percentage of GDP, investors modify their investment plans accordingly. It is our contention that the direct effect of government size on fixed capital investment manifest themselves through a downward shift in the investment schedule. To test this hypothesis, we estimate an aggregate investment function for eighteen O.E.C.D. countries for the period 1960-1994. Our findings suggest a negative relationship between government size and fixed capital investment. [ E22, E62]

Empirical evidence on the natural rate hypothesis and Fisher effect for the U.S. 1953–1978

Abstract A joint study of the natural rate hypothesis and Fisher effect is conducted using an errors-in-variables model. The model accommodates both measurement errors in the survey data on price expectations and an autoregressive formulation for the same. It is estimated by various methods for the United States for the period 1953–1978. The following are the conclusions: 1. 1. The results on the Phillips relation are mixed and inconclusive. 2. 2. There is a strong relationship between nominal interest rates and the expected rate of inflation except during 1953–1960.