Kyriakos C. Neanidis

The Allocation of Public Expenditure and Economic Growth

This paper studies the optimal allocation of government spending between health, education and infrastructure in an endogenous growth framework. Infrastructure affects not only the production of goods but also the supply of health and education services. The production of health (education) services depends also on the stock of human capital (health services). Transitional dynamics associated with budget‐neutral shifts in the composition of expenditure are analyzed, and growth‐ and welfare‐maximizing allocation rules are derived and compared. The discussion highlights the role played by the externalities associated with all three types of public services in the health and human capital technologies.

The Optimal Public Expenditure Financing Policy: Does the Level of Economic Development Matter?

This paper explores how the optimal mode of public finance depends on the stage of economic development. The theoretical analysis is based on an overlapping generations growth model with an imperfect capital market. Random shocks create a demand for liquidity and establish a role for financial intermediaries. In this model, inflation matters because it affects the relative rates of return on assets in such a way that money becomes the preferred asset in the portfolio holdings of banks, causing a detrimental effect on economic growth. Such an effect is stronger (weaker) at lower (higher) levels of economic development due to the higher (lower) default risks associated with lending. Consequently, income taxation (seigniorage) is a relatively less distortionary way of financing public expenditure for low-income (high-income) countries. We provide empirical support for our model’s predictions using a panel of 21 OECD and 40 developing countries observed over the period 1972-1999.

Humanitarian Aid, Fertility and Economic Growth

This paper examines the effect of humanitarian aid on fertility and economic growth. In an overlapping generations model, where health status in adulthood depends on health in childhood, adult agents allocate their time to work, leisure and childrearing activities. Humanitarian aid influences the probability of survival to adulthood, health in childhood, and the time that adults allocate to childrearing, giving rise to an ambiguous effect on both fertility and growth. An empirical investigation for the period 1973–2007 suggests that humanitarian aid has on average a zero effect on the rates of fertility and of per capita output growth.

WHAT IS DRIVING FINANCIAL DOLLARIZATION IN TRANSITION ECONOMIES? A DYNAMIC FACTOR ANALYSIS

This paper investigates the impact of institutions on the dollarization of the domestic banking system by using a unique policy experiment: the accession process of countries to the European Union (EU). Using a dynamic factor model, we decompose fluctuations in financial dollarization for 24 transition economies into a world factor, an EU factor, and country-specific factors. The EU factor, which proxies for improvements in institutions under the set criteria for eventual membership, reveals the importance of institutions for the extent of …nancial dollarization over time. The results also indicate the asymmetric impact of improved institutions on the domestic bank’s balance sheets by inducing higher loan dollarization and lower deposit dollarization. The relative importance of the EU factor to the financial dollarization of a country is associated with the degree of comovement of its business cycle with that of the EU.

Optimal taxation and growth with public goods and costly enforcement

This paper studies optimal direct and indirect taxation in an endogenous growth framework with a productive public good and costly tax collection. Optimal (growth-maximizing) tax rules are derived under exogenous collection costs. The optimal direct–indirect tax ratio is shown to be negatively related to the administrative costs of collecting these taxes, as documented in cross-country data. This result also holds under endogenous collection costs (with these costs inversely related to administrative spending on tax enforcement), but for these to generate significant effects on tax collection requires implausibly high degrees of efficiency in spending, or the allocation of a large fraction of resources to tax enforcement. Depending on how it is financed, the latter policy may entail adverse effects on growth. Improving ‘tax culture’ and the sense of civic duty through greater budgetary transparency may be a more effective policy to improve tax collection and promote economic growth.

Corruption, fiscal policy, and growth: A unified approach

Abstract We study the effects of bureaucratic corruption on fiscal policy and economic growth, where corruption (i) reduces the tax revenue raised from households, (ii) inflates the volume of government spending, and (iii) reduces the productivity of “effective” government expenditure. We distinguish between the policies pursued by (a) a non-optimizing, and (b) an optimizing government. For both cases, corruption leads to higher income tax and inflation rates and a lower level of government spending, thus hindering growth. In the circumstances, an activist government could allocate its resources in attempting to reduce the type of corruption that harms growth the most. Finally, the findings from our unified framework could rationalize the sometimes conflicting empirical evidence on the impact of corruption on growth in the literature.

Demographic Transition and Economic Welfare: The Role of Humanitarian Aid

This paper considers the effects of humanitarian aid on economic welfare through a demographic transition channel. We develop a two-period overlapping generations model where reproductive agents face a non-zero probability of death in childhood. As adults, agents allocate their time to work, leisure, and child rearing activities. Health status in adulthood exhibits “state dependence,” as it depends on health in childhood. In this framework, we examine the effects of changes in in-kind and monetary humanitarian aid on economic welfare. We conclude that if parents strongly value children, giving monetary aid produces more children and yields higher welfare. This positive welfare effect dominates an indirect negative welfare effect due to a lower growth rate. But, if parents value the quality of their children (health status), they achieve greater utility by in-kind aid, which also lowers fertility and augments economic growth.