Abstract
Abstract The aim of the study is to examine the impact of public expenditure on economic growth of Kosovo. Time series data span for the period of time 2002-2015. The structure of the econometric model is built on Keynesian theories and endogenous growth model. The model estimation is performed only after implementing the Augmented Dickey-Fuller (ADF) Unit Root test to estimate if time series are stationary. Several tests have been implemented to determine model validity. The model has met all the assumptions of statistical tests: error term residuals have a normal distribution (Jarque-Bera test), there is no auto-correlation between variables (Breusch-Godfrey Serial test), and error variances are constant, known as the principle of homoscedasticity (Breusch-Pagan-Godfrey test). Gross domestic product is used as a dependent variable in the model, while public expenditure (G), foreign direct investment (FDI), export (EXP) and total budget revenue (TrTax) are used as the endogenous variables. The study results have revealed that there is a positive and statistically significant effect of public expenditures and exports on economic growth. Total budget revenue has a positive impact on economic growth but this has not been proved to be statistically significant. The authors of the research have also found out that FDI is negative and statistically insignificant.
Highlights
Government functions and activities are important because they provide a public good and minimise some of the imperfections and failures of the market mechanism
According to the overall analysis of the performed models, it can be concluded that the models that are built are statistically important and can provide a consistent assessment of the impact of public spending on the economic growth of Kosovo
The results obtained show that out of four variables used in the estimation public spending (G) and exports (EXP) have a positive and statistically significant effect on economic growth, while the other two variables such as total budget revenue (TrTax) and foreign direct investment (FDI) have been found to be statistically insignificant
Summary
Government functions and activities are important because they provide a public good and minimise some of the imperfections and failures of the market mechanism. These functions and activities can be executed by utilising public spending instruments. Public spending is considered to be an important tool of fiscal policy, which includes all consumer goods, investment payments and redistribution of the income. Stiglitz and Atkinson (1980) states that public spending should create favourable conditions for economic development through improving and maintaining the investment climate, and achieving the main objectives of economic growth. According to Tanzi and Zee (1997), fiscal policy is implemented by using fiscal instruments (taxes and expenditures) to influence the economic system in order to maximise economic well-being with the main objective of stimulating the long-term economic growth
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