Stabilizing economic growth: Growth target and government expenditure since World War II

Abstract

This paper investigates how the government stabilizes economic growth from the perspective of government expenditure. We contribute a method to identify the government expenditure aimed at stabilizing growth and empirically examine it using a dataset of economic growth targets. We find that when the economy encounters adverse shocks, government expenditure increases significantly by 1.1 percentage points on average for every one percentage point increase in the growth target. We document the following patterns of stabilizing growth: (1) government increases expenditure on economic affairs rather than on other functions; (2) government expenditure is financed by current revenue; and (3) it is a temporary behavior to stabilize growth. This paper also suggests that stabilizing growth by increasing government expenditure is a global phenomenon.