Expenditure-Growth Nexus:Does the Source of Finance Matter? Empirical Evidence from Selected South Asian Countries

Abstract

Government can generate revenues to finance its expenditure in three major ways i.e., taxes, bonds and seigniorage.1 Interestingly, public expenditure financed through different sources affect growth differently. Which source of finance is less distortionary? is a question that has attracted great attention over the years. However, no consensus is available on the relative importance of the financing source. The prominent work on this issue relates to Miller and Russek (1997) who provide a detailed discussion over the relative importance of tax financed and debt financed increases in government expenditure in terms of economic growth and report that the results vary considerably as the source of finance differs.2 Similarly, Bose, Holman and Neanidis (2005) compare the effect of tax financed and seigniorage financed increases in public expenditure on economic growth.3 Likewise, Palivos and Yip (1995) analyse the effects of tax financed and money financed government consumption expenditure on economic growth and social welfare within a framework of endogenous growth model. Latter, in another study Espinosa-Vega and Yip (1999) study the effects of money financed and tax financed increases in government consumption expenditure on inflation and economic growth.