Abstract
This paper analyzes the effect of public spending on the Chilean economy by analyzing quarterly data for the period 1990-2018. GDP and public expenditure among other macroeconomic variables have been used to estimate a VEC (Vector Error Correction) model. The main objective is to investigate an important component of public spending, such as Government transfers, and their impact on economic growth. Results show a bidirectional causal relationship of the Granger type between GDP and spending on government subsidies. By the same token, there is a unidirectional relationship of the unemployment rate towards subsidy spending. Through a VEC model, short and longterm elasticities are estimated to analyze the adjustment dynamics between the variables being studied, noting the important effect that GDP has on government subsidies spending and the null effect of these subsidies on Chile’s economic growth.
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