An Examining the impact of government spending shocks on total factor productivity: Testing Baumol's theory of unbalanced productivity growth in selected developing countries

Document Type : Original Article

Authors

1 Department of Economics. Faculty of Economics and Social Sciences. Bu-Ali Sina University. Hamadan. Iran

2 Department of Economics, Faculty of Economics and Social Sciences, Bu-Ali Sina University, hamadan, iran

Abstract

The primary objective of this paper is to examine the effects of government spending shocks on total factor productivity (TFP) while also testing Baumol's unbalanced productivity growth theory in a selection of developing countries over the period 2003–2019. In this study, TFP is measured using the Hicks-Moorsteen approach, and the Factor-Augmented Vector Autoregression (FAVAR) method is employed to analyze the effects of shocks.Given that sustainable economic growth is not only driven by increased investment and labor but also by productivity improvements—and considering that in many developing countries, the government plays a central role in the economy—government spending can significantly influence productivity. Therefore, it is essential to investigate the impact of government spending shocks on TFP.Impulse response functions derived from the estimated model indicate that a positive shock to current expenditures and subsidies leads to a decline in TFP. Additionally, the impulse response function of a positive shock to TFP initially stimulates government capital expenditures in the short run but, after the fourth quarter, results in their decline. This finding supports Baumol's unbalanced productivity growth theory, which suggests that rising TFP is associated with an increase in government spending on public goods production, ultimately leading to a reduction in capital expenditures by the government. TFP is significantly influenced by fiscal and economic policies; financial shocks, such as increases or decreases in government spending, can have a notable impact on TFP, particularly through changes in private sector productivity. The performance of fiscal policies has always been a topic of discussion in macroeconomics, and one of the important economic variables affected by financial shocks is TFP.

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History

  • Receive Date: 18 November 2024
  • Revise Date: 06 March 2025
  • Accept Date: 08 March 2025

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