Volatility in Discretionary Public Spending and Economic Growth: A Cross Country Analysis

Muhsin Ali, Karim Khan


Volatility in discretionary public spending has diverse
implications for the overall economic performance of economies. In this
study, we examine the impact of volatile non�systematic discretionary
public spending on economic growth. By employing cross-country data of
74 developed and developing economies, we find that volatility in
non-systematic discretionary public spending has an adverse impact on
economic growth. In particular, such impact is severe in the case of
less developed economies. Our findings are robust to the problem of
endogeneity. In order to ensure the accuracy of the results, we conduct
sufficient sensitivity analysis by incorporating a bunch of potential
control variables. In most of the cases, the results with regard to the
policy volatility remain intact. This suggests that effective spending
rules, i.e. permanent numerical limits, should be imposed on budgetary
aggregates to restrain governments from the volatile use of
discretionary spending. JEL Classification: H3; H5 Keywords: Volatility
in Discretionary Public Spending, Economic Growth, Effective Spending

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DOI: https://doi.org/10.30541/v59i1pp.45-68


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