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Government expenditure and economic growth in the EU: long-run tendencies and short-term adjustment

Alfonso Arpaia (European Commission) & Alessandro Turrini (European Commission and CEPR)

Government expenditure and economic growth in the EU: long-run tendencies and short-term adjustment - Alfonso Arpaia and Alessandro Turrinipdf(927 kB) Choose translations of the previous link 

This paper analyses both the long and the short-run relation between government expenditure and potential output in EU countries by means of pooled mean group estimation (Pesaran, Shin, and Smith (1999)). 

Results show that, over a sample comprising EU-15 countries over the 1970-2003 period, it cannot be rejected the hypothesis of a common long-term elasticity between cyclically-adjusted primary expenditure and potential output close to unity. However, the long-run elasticity decreased considerably over the decades and is significantly higher than unity in catching-up countries, in fast-ageing countries, in low-debt countries, and in countries with weak numerical rules for the control of government spending.

The average speed of adjustment of government expenditure to its long-tem relation is 3 years, but there are significant differences across countries. Anglo-Saxon and Nordic countries exhibit in general a faster adjustment process, while adjustment in Southern European countries appears somehow slower.

(European Economy. Economic Papers. 300. February 2008. Brussels. pdf. 52pp. Tab. Graph. Ann. Bibliogr. )

KC-AI-08-300-EN-C (online)
ISBN 978-92-79-08225-2 (online)
ISSN 1725-3187
doi:10.2765/22776 (online)

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