A Dynamic Panel Analysis of the Relationship between Public Expenditure and Regional Economic Growth

Abstract

  This paper examines whether public expenditure contributes regional economic growth using Japanese prefecture-level panel data from 1975 to 2005. We apply growth regression approach advocated by Barro(1991) to investigate it. Our contributions to the literature are that a dynamic panel strategy is employed in order to correct for the endogeneity of public expenditure, and that both public consumption and public investment expenditure in addition to public capital are considered as potential determinants of regional economic growth. The empirical results show that regional economic convergence applies in a sense that regional economic growth is reversely related to initial output per capita, and that public capital contributes regional economic growth and spillover effects are also observed. On the other hand: public investment expenditure does not statistically significant and public consumption expenditure negatively significant in the growth regression. This result suggests that public expenditure is not necessarily effective in promoting regional economic growth in the long run.