Financial development and the composition of government expenditure: Theory and cross-country evidence

Zhigang Chen, Bingyang Lv and Yongzheng Liu

International Review of Economics & Finance, 2019, vol. 64, issue C, 600-611

Abstract: This paper explores the effect of financial development on the composition of government expenditure. We establish an endogenous growth model to consider the role of financial development. We demonstrate that because of the efficiency loss induced by lower financial development, private investment is constrained and hence governments tend to spend on higher productive expenditure to maintain a certain economic growth rate. Relying on a large sample of 105 countries over 1984–2009, we find supporting evidence that countries with higher financial development tend to have lower productive expenditure. This result is robust across alternative measures of the key variables and alternative estimations with and without correcting the potential endogeneity issue of financial development.

Keywords: Financial development; Productive expenditure; Cross-country (search for similar items in EconPapers)
JEL-codes: G10 H72 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056018307822
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:64:y:2019:i:c:p:600-611

DOI: 10.1016/j.iref.2019.09.006

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().