Interest rates affect public expenditure growth

Guillermo Peña; Guillermo Peña

doi:10.3934/QFE.2023030

Quantitative Finance and Economics

2023, Volume 7, Issue 4: 622-645. doi: 10.3934/QFE.2023030

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Research article

Interest rates affect public expenditure growth

Guillermo Peña ^,

Departamento de Análisis Económico and IEDIS, Universidad de Zaragoza, Spain

Received: 22 July 2023 Revised: 17 November 2023 Accepted: 24 November 2023 Published: 29 November 2023
JEL Codes: H61, H62, G21, H25

The aim of this paper is to analyze interest rates and public spending to provide policy implications. Concretely, it explores the influence of these rates on public expenditure growth as opposite to the traditional direction view, dealing with 216 countries for the 1972–2021 period and estimating system GMM models. A balanced subsample is used for assessing Granger causality through a recent panel technique. The results are robust for the used dependent and target variables and also the methodology. They show that decreasing interest rates are associated with—and in some cases also lead to—lower per capita public expenditure growth. These results can be interpreted as a twofold effect of shifts in relative prices—through fiscal illusion—and of crowding out of private investment with respect to the public sector.
- public budgeting,
- interest rates,
- tax prices,
- household perceptions,
- fiscal illusion
Citation: Guillermo Peña. Interest rates affect public expenditure growth[J]. Quantitative Finance and Economics, 2023, 7(4): 622-645. doi: 10.3934/QFE.2023030

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Abstract

The aim of this paper is to analyze interest rates and public spending to provide policy implications. Concretely, it explores the influence of these rates on public expenditure growth as opposite to the traditional direction view, dealing with 216 countries for the 1972–2021 period and estimating system GMM models. A balanced subsample is used for assessing Granger causality through a recent panel technique. The results are robust for the used dependent and target variables and also the methodology. They show that decreasing interest rates are associated with—and in some cases also lead to—lower per capita public expenditure growth. These results can be interpreted as a twofold effect of shifts in relative prices—through fiscal illusion—and of crowding out of private investment with respect to the public sector.

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