Productive Public Spending, Knowledge Spillovers and Convergence: A Multi-Country Analysis

This paper develops a multi-country AK model of endogenous growth with international knowledge transmission to study the impact of productive public expenditure on growth and convergence. A leader advances the global technology frontier, and followers benefit from spillovers only once their knowledge reaches a threshold. Productive public expenditure helps followers reach this threshold; once attained, their growth rate converges to the leader’s and spillover gains taper as the gap closes. Using dynamic heterogeneous panel models, we find evidence for this mechanism: productive public expenditure lifts growth only for countries consistently below the threshold, spillovers peak at the threshold, and they fade as economies near the frontier.