Testing the endogenous growth model: public expenditure, taxation, and growth over the long run

Endogenous growth models, such as Barro (1990), predict that government expenditure and taxation will have both temporary and permanent effects on growth. We test this prediction using panels of annual and period-averaged data for OECD countries during 1970-95, isolating long-run from short-run fiscal effects. Our results strongly support the endogenous growth model and suggest that long-run fiscal effects are not fully captured by period averaging and static panel methods. Unlike previous investigations, our estimates are free from biases associated with incomplete specification of the government budget constraint and do not appear to result from endogeneity of fiscal or investment variables.