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Government Expenditure and Economic Growth: A Demand-side Analysis

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  • Parui, Pintu
Abstract
In a post-Keynesian growth model with positive saving propensity out of wages, in this paper we analyze the implication of different kinds of government expenditures on aggregate demand and economic growth. We distinguish government expenditure into consumption and investment expenditure. The basic idea is that certain kind of government investment expenditure influences labour productivity. In a formal model we incorporate this idea by assuming labour productivity as an increasing function of government investment expenditure. When the economy is in an exhilarationist regime, under the balanced budget assumption, we show that a shift in government expenditure from consumption to investment purposes leads to an unambiguous rise in both aggregate demand and economic growth. However the result is ambiguous in the stagnationist regime. Once the balanced budget assumption is dropped, while in a stagnationist regime a rise in government investment expenditure may decrease aggregate demand and growth, it unambiguously raises both aggregate demand and growth rate in an exhilarationist regime. On the other hand, in the absence of balanced budget assumption, a rise in government consumption expenditure has positive effect on both the regimes . We also show that allowing the government to run into deficit and incur in debt does not necessarily lead to the public debt to rise without bound.

Suggested Citation

  • Parui, Pintu, 2015. "Government Expenditure and Economic Growth: A Demand-side Analysis," MPRA Paper 66855, University Library of Munich, Germany, revised 30 Dec 2019.
    • Handle: RePEc:pra:mprapa:66855
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    File URL: https://mpra.ub.uni-muenchen.de/66855/1/MPRA_paper_66855.pdf
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    References listed on IDEAS

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    8. Andrew Sharpe & Jean-François Arsenault & Peter Harrison, 2008. "The Relationship between Productivity and Real Wage Growth in Canada and OECD Countries, 1961-2006," CSLS Research Reports 2008-08, Centre for the Study of Living Standards.
    9. Andrew Sharpe & Jean-Francois Arsenault & Peter Harrison, 2008. "Why Have Real Wages Lagged Labour Productivity Growth in Canada?," International Productivity Monitor, Centre for the Study of Living Standards, vol. 17, pages 16-27, Fall.
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    Cited by:

    1. Pintu Parui, 2024. "Fiscal expansion, government debt and economic growth: a post-Keynesian perspective," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 47(1), pages 117-154, January.

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    More about this item

    Keywords

    Post-Keynesian; Employment Rate; Fiscal Policy; Growth Model;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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