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Volume :9 Issue : 3 2002      Add To Cart                                                                    Download

Government Spending in A Dynamic Model of Endogenous Growth, with Application to the State of Kuwait

Auther : Khalifa H. Ghali
Naief H. Al-Mutairi

This paper extends Barro’s (1990) endogenous growth model to a dynamic vector error-correction model in order to test for the existence and direction of causality between government expenditures and economic growth and, hence, discriminate between alternative theoretical hypotheses. The question that we address is whether changes in government expenditures lead to changes in economic growth or whether they are simply following the growth of output generated elsewhere. Using data on Kuwait, were able to identify both direct as well as indirect causal links between the variables, a result that the existing literature could not achieve because of the common use of a single growth equation. In particular; we found that, while output growth has a direct impact on government expenditures, government investment has an indirect impact on economic growth manifested through its own impact on private investment.

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