Abstract
This paper provides instrumental variable estimates of the permanent income elasticity of government expenditures. It uses annual variation in the international oil price weighted with countries' average oil net-export GDP shares as a plausibly exogenous source of within-country variation in countries' permanent income. The short-run estimates of the permanent income elasticity are robust across alternative specifications and are below one: the estimated elasticity coefficients range between 0.3 and 0.6 and have standard errors of 0.1 and 0.4, respectively. Point estimates of long-run elasticities are somewhat larger but still smaller than unity. The investment component of government spending is found to be more elastic than the consumption component, whereas elasticity differences between rich and poor countries are insignificant.
Original language | American English |
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Pages (from-to) | 1025-1035 |
Number of pages | 11 |
Journal | Journal of Public Economics |
Volume | 96 |
Issue number | 11-12 |
DOIs | |
State | Published - 1 Dec 2012 |
Keywords
- Permanent income elasticity of government spending
- Wagner law
All Science Journal Classification (ASJC) codes
- Economics and Econometrics
- Finance