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

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