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.
Federico et al. (Sun,) studied this question.