Investigating the Effects of Shock to the Public Education Expenditure on Economic Growth

Objective: From a macroeconomic perspective, human capital accumulation improves labor productivity, facilitates technological innovation, and increases the return on capital. Also, human capital makes growth more stable, which in turn leads to poverty reduction. In other words, human capital at the macro level is considered as a key production factor in the production function at the economic level. Education expenditure is very crucial for the formation of human capital and as a result economic growth; Because by reducing education costs, it increases the demand for education and plays an important role in increasing its quality. Therefore, the formation of human capital is an important factor for growth. Regardless of the contribution of education in sustainable economic growth, education is a consumer goods that directly contributes to people's welfare. Based on this, the United Nations Development Programme mentions education as one of the key components of human development index. For this reason, governments make significant investments in education. Considering the importance of the role of public education expenditure in the formation of human capital, the main goal of this study is to understand the effect of shocks to the government expenditure in the education sector on Iran's economy. In this regard, according to the characteristics of dynamic stochastic general equilibrium (DSGE) models in estimating the effects of shocks on the economy, a DSGE model suitable for the structure of Iran's economy and the Bayesian approach has been used.



Methods: In this paper, a dynamic stochastic general equilibrium model is presented and estimated using the Bayesian approach and seasonal data in the period of 2004:4-2021:5. The primary core of the current research is designed based on the Angelopoulos, Malley & Philippopoulos (2009) and by expanding this model, the effect of shocks to the government expenditure in the education sector on the Iran's economy has been investigated. In this regard, the studied DSGE model includes households with an unlimited planning horizon, a representative firm producing a homogeneous final product in a perfectly competitive environment, the firms that produce intermediate goods, the government, and the oil sector. There are (j) firms producing intermediate goods that produce heterogeneous good and imperfect substitutes under conditions of monopolistic competition. Intermediate goods are combined with each other by the firm producing the final goods under a Dixit-Stiglitz accumulator and presented to the household as the final goods. In order to estimate model parameters, Bayesian method and Random Walk Metropolis-Hastings algorithm were used. The data of the observable variables of the model include seasonally adjusted data of Gross Domestic Production (GDP), private consumption, investment and the gross growth rate of money; which have been detrended using the Hodrick-Prescott filter.

Brooks and Gelman (1998) diagnostic test and Monte Carlo Markov chain show that the parameter estimation is appropriate and reliable. This test shows three parameters, interval, second order moment (m2) and third order moment (m3). After extracting these Markov chains of parameters using Metropolis Hastings algorithm, the degree of accuracy of the chains was tested. According to the results of this test, the intra-chain and inter-chain variance of all parameters have finally converged. Therefore, the Bayesian estimation results have good accuracy.



Results: An increase in public education expenses by one standard deviation has caused an increase in private education expenses. Because private and public education expenses complement each other and entered the model in the form of a Cobb-Douglas function. Therefore, in general, investment in education and subsequently, human capital has increased. Increasing human capital has increased production, economic growth and reduced inflation. The decrease in inflation has led to an increase in the real wages of the workforce and finally the desire of the household to increase the supply of labor. An increase in real wages has led to an increase in consumption. Also, the increase in labor supply has increased the final productivity of physical capital, which is due to the complementarity of labor and capital in the Cobb-Douglas production function. This causes an increase in physical investment. The behavior of investment is very similar to the behavior of consumption and production, but its changes are more intense compared to other expenses; Because investment expenses are naturally more volatile than other expenses. Finally, due to the decrease in inflation, the real exchange rate has decreased. The results of this research are consistent and similar with the results of Angelopoulos et al. (2009), and are not similar to the results of Akbarian and Phamkar's (2009).



Conclusion: As a general result, it can be said that the shocks to the public education expenditure, such as the expansionary policy, have affected the performance of the economy and improved the economic conditions. It is suggested that public education expenditure be explained as a long-term investment in the economy. Also, the training of human resources according to the needs of the labor market should be put on the agenda.