Empirical Approach of the Nexus between Public Expenditures and Economic Growth: Case of Republic of Kosovo

Abstract

The main objective of this paper is to investigate the impact of public expenditures on economic growth in the case of Republic of Kosovo, by addressing its significant nexus for the last decade and such results for further recommendation for future fiscal policies. Further, the paper analysis whether public expenditures have positive impact on economic growth in Republic of Kosovo, by investigating the impact of the types of public expenditures on growth. In addition, for determining the stationarity of the time series 2006m1 – 2016m9, Augmented Dickey Fuller test was employed, while VAR model was used to determine the long-run relationship between types of public expenditures and economic growth in Kosovo. The results of the empirical analysis reveal that the data are stationary in their level, while VAR results suggest positive and significant effects of transfers on real GDP, based on the positive coefficient and significance value p = 0.009, while negative and significant effects from municipal expenditures, based on the value of p = 0.066 in this model. Further, expenditures on wages, capital and subsidies have a positive but no significant effect on growth, while expenditures for goods have negative but no significant effect on economic growth in the case of the Republic of Kosovo.

Finally, the paper can present a contribution on the existing literature regarding the nexus between public expenditures and economic growth, and for improvement of efficiency utilization of public expenditures in regarding their productivity.

Key words: growth, fiscal policy, unit root, VAR.