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Discussion Paper Details

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Title: Fiscal spending for economic growth in the presence of imperfect markets

Author(s): Asif Islam and Ram�n L�pez

Publication Date: December 2011

Keyword(s): economic growth investment, government spending, market imperfections and non-social subsidies

Programme Area(s): International Macroeconomics

Abstract: Political economy factors tend to induce many governments to spend on private goods (non-social subsidies) to the detriment of spending on social and public goods. We show that this bias in spending patterns is particularly costly for economic growth when capital markets are imperfect. We thus provide a simple taxonomy of government spending: spending in goods that mitigate market failures versus spending in non-social subsidies which frequently have the sole purpose of benefiting special interest groups. We develop a theoretical model and link it quite closely to an empirical model. The empirical results fully corroborate the hypothesis that spending biases in favor of non-social subsidies reduce the rate of economic growth over the long run. The empirical findings are exceptionally robust.

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Bibliographic Reference

Islam, A and L�pez, R. 2011. 'Fiscal spending for economic growth in the presence of imperfect markets'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8709