Volatility in Discretionary Public Spending and Economic Growth: A Cross Country Analysis

Volatility in discretionary public spending has diverseimplications for the overall economic performance of economies. In thisstudy, we examine the impact of volatile nonsystematic discretionarypublic spending on economic growth. By employing cross-country data of74 developed and developing economies, we find that volatility innon-systematic discretionary public spending has an adverse impact oneconomic growth. In particular, such impact is severe in the case ofless developed economies. Our findings are robust to the problem ofendogeneity. In order to ensure the accuracy of the results, we conductsufficient sensitivity analysis by incorporating a bunch of potentialcontrol variables. In most of the cases, the results with regard to thepolicy volatility remain intact. This suggests that effective spendingrules, i.e. permanent numerical limits, should be imposed on budgetaryaggregates to restrain governments from the volatile use ofdiscretionary spending. JEL Classification: H3; H5 Keywords: Volatilityin Discretionary Public Spending, Economic Growth, Effective SpendingRule