Research article

Interest rates affect public expenditure growth

  • Received: 22 July 2023 Revised: 17 November 2023 Accepted: 24 November 2023 Published: 29 November 2023
  • JEL Codes: H61, H62, G21, H25

  • The aim of this paper is to analyze interest rates and public spending to provide policy implications. Concretely, it explores the influence of these rates on public expenditure growth as opposite to the traditional direction view, dealing with 216 countries for the 1972–2021 period and estimating system GMM models. A balanced subsample is used for assessing Granger causality through a recent panel technique. The results are robust for the used dependent and target variables and also the methodology. They show that decreasing interest rates are associated with—and in some cases also lead to—lower per capita public expenditure growth. These results can be interpreted as a twofold effect of shifts in relative prices—through fiscal illusion—and of crowding out of private investment with respect to the public sector.

    Citation: Guillermo Peña. Interest rates affect public expenditure growth[J]. Quantitative Finance and Economics, 2023, 7(4): 622-645. doi: 10.3934/QFE.2023030

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  • The aim of this paper is to analyze interest rates and public spending to provide policy implications. Concretely, it explores the influence of these rates on public expenditure growth as opposite to the traditional direction view, dealing with 216 countries for the 1972–2021 period and estimating system GMM models. A balanced subsample is used for assessing Granger causality through a recent panel technique. The results are robust for the used dependent and target variables and also the methodology. They show that decreasing interest rates are associated with—and in some cases also lead to—lower per capita public expenditure growth. These results can be interpreted as a twofold effect of shifts in relative prices—through fiscal illusion—and of crowding out of private investment with respect to the public sector.



    In [1] (see [2] for type A), the authors introduced cluster categories which were associated to finite dimensional hereditary algebras. It is well known that cluster-tilting theory gives a way to construct abelian categories from some triangulated and exact categories.

    Recently, Nakaoka and Palu introduced extriangulated categories in [3], which are a simultaneous generalization of exact categories and triangulated categories, see also [4,5,6]. Subcategories of an extriangulated category which are closed under extension are also extriangulated categories. However, there exist some other examples of extriangulated categories which are neither exact nor triangulated, see [6,7,8].

    When T is a cluster tilting subcategory, the authors Yang, Zhou and Zhu [9, Definition 3.1] introduced the notions of T[1]-cluster tilting subcategories (also called ghost cluster tilting subcategories) and weak T[1]-cluster tilting subcategories in a triangulated category C, which are generalizations of cluster tilting subcategories. In these works, the authors investigated the relationship between C and modT via the restricted Yoneda functor G more closely. More precisely, they gave a bijection between the class of T[1]-cluster tilting subcategories of C and the class of support τ-tilting pairs of modT, see [9, Theorems 4.3 and 4.4].

    Inspired by Yang, Zhou and Zhu [9] and Liu and Zhou [10], we introduce the notion of relative cluster tilting subcategories in an extriangulated category B. More importantly, we want to investigate the relationship between relative cluster tilting subcategories and some important subcategories of modΩ(T)_ (see Theorem 3.9 and Corollary 3.10), which generalizes and improves the work by Yang, Zhou and Zhu [9] and Liu and Zhou [10].

    It is worth noting that the proof idea of our main results in this manuscript is similar to that in [9, Theorems 4.3 and 4.4], however, the generalization is nontrivial and we give a new proof technique.

    Throughout the paper, let B denote an additive category. The subcategories considered are full additive subcategories which are closed under isomorphisms. Let [X](A,B) denote the subgroup of HomB(A,B) consisting of morphisms which factor through objects in a subcategory X. The quotient category B/[X] of B by a subcategory X is the category with the same objects as B and the space of morphisms from A to B is the quotient of group of morphisms from A to B in B by the subgroup consisting of morphisms factor through objects in X. We use Ab to denote the category of abelian groups.

    In the following, we recall the definition and some properties of extriangulated categories from [4], [11] and [3].

    Suppose there exists a biadditive functor E:Bop×BAb. Let A,CB be two objects, an element δE(C,A) is called an E-extension. Zero element in E(C,A) is called the split E-extension.

    Let s be a correspondence, which associates any E-extension δE(C,A) to an equivalence class s(δ)=[AxByC]. Moreover, if s satisfies the conditions in [3, Definition 2.9], we call it a realization of E.

    Definition 2.1. [3, Definition 2.12] A triplet (B,E,s) is called an externally triangulated category, or for short, extriangulated category if

    (ET1) E:Bop×BAb is a biadditive functor.

    (ET2) s is an additive realization of E.

    (ET3) For a pair of E-extensions δE(C,A) and δE(C,A), realized as s(δ)=[AxByC] and s(δ)=[AxByC]. If there exists a commutative square,

    then there exists a morphism c:CC which makes the above diagram commutative.

    (ET3)op Dual of (ET3).

    (ET4) Let δ and δ be two E-extensions realized by AfBfD and BgCgF, respectively. Then there exist an object EB, and a commutative diagram

    and an E-extension δ realized by AhChE, which satisfy the following compatibilities:

    (i). DdEeF realizes E(F,f)(δ),

    (ii). E(d,A)(δ)=δ,

    (iii). E(E,f)(δ)=E(e,B)(δ).

    (ET4op) Dual of (ET4).

    Let B be an extriangulated category, we recall some notations from [3,6].

    ● We call a sequence XxYyZ a conflation if it realizes some E-extension δE(Z,X), where the morphism x is called an inflation, the morphism y is called an deflation and XxYyZδ is called an E-triangle.

    ●When XxYyZδ is an E-triangle, X is called the CoCone of the deflation y, and denote it by CoCone(y); C is called the Cone of the inflation x, and denote it by Cone(x).

    Remark 2.2. 1) Both inflations and deflations are closed under composition.

    2) We call a subcategory T extension-closed if for any E-triangle XxYyZδ with X, ZT, then YT.

    Denote I by the subcategory of all injective objects of B and P by the subcategory of all projective objects.

    In an extriangulated category having enough projectives and injectives, Liu and Nakaoka [4] defined the higher extension groups as

    Ei+1(X,Y)=E(Ωi(X),Y)=E(X,Σi(Y)) for i0.

    By [3, Corollary 3.5], there exists a useful lemma.

    Lemma 2.3. For a pair of E-triangles LlMmN and DdEeF. If there is a commutative diagram

    f factors through l if and only if h factors through e.

    In this section, B is always an extriangulated category and T is always a cluster tilting subcategory [6, Definition 2.10].

    Let A, BB be two objects, denote by [¯T](A,ΣB) the subset of B(A,ΣB) such that f[¯T](A,ΣB) if we have f: ATΣB where TT and the following commutative diagram

    where I is an injective object of B [10, Definition 3.2].

    Let M and N be two subcategories of B. The notation [¯T](M,Σ(N))=[T](M,Σ(N)) will mean that [¯T](M,ΣN)=[T](M,ΣN) for every object MM and NN.

    Now, we give the definition of T-cluster tilting subcategories.

    Definition 3.1 Let X be a subcategory of B.

    1) [11, Definition 2.14] X is called T-rigid if [¯T](X,ΣX)=[T](X,ΣX);

    2) X is called T-cluster tilting if X is strongly functorially finite in B and X={MC[¯T](X,ΣM)=[T](X,ΣM) and [¯T](M,ΣX)=[T](M,ΣX)}.

    Remark 3.2. 1) Rigid subcategories are always T-rigid by [6, Definition 2.10];

    2) T-cluster tilting subcategories are always T-rigid;

    3) T-cluster tilting subcategories always contain the class of projective objects P and injective objects I.

    Remark 3.3. Since T is a cluster tilting subcategory, XB, there exists a commutative diagram by [6, Remark 2.11] and Definition 2.1((ET4)op), where T1, T2T and h is a left T-approximation of X:

    Hence XB, there always exists an E-triangle

    Ω(T1)fXΩ(T2)X with TiT.

    By Remark 3.2(3), PT and B=CoCone(T,T) by [6, Remark 2.11(1),(2)]. Following from [4, Theorem 3.2], B_=B/T is an abelian category. fB(A,C), denote by f_ the image of f under the natural quotient functor BB_.

    Let Ω(T)=CoCone(P,T), then Ω(T)_ is the subcategory consisting of projective objects of B_ by [4, Theorem 4.10]. Moreover, modΩ(T)_ denotes the category of coherent functors over the category of Ω(T)_ by [4, Fact 4.13].

    Let G: BmodΩ(T)_, MHomB_(,M)Ω(T)_ be the restricted Yoneda functor. Then G is homological, i.e., any E-triangle XYZ in B yields an exact sequence G(X)G(Y)G(Z) in modΩ(T)_. Similar to [9, Theorem 2.8], we obtain a lemma:

    Lemma 3.4. Denote proj(modΩ(T)_) the subcategory of projective objects in modΩ(T)_. Then

    1) G induces an equivalence Ω(T)proj(modΩ(T)_).

    2) For NmodΩ(T)_, there exists a natural isomorphism

    HommodΩ(T)_(G(Ω(T)),N)N(Ω(T)).

    In the following, we investigate the relationship between B and modΩ(T)_ via G more closely.

    Lemma 3.5. Let X be any subcategory of B. Then

    1) any object XX, there is a projective presentation in mod Ω(T)_

    PG(X)1πG(X)PG(X)0G(X)0.

    2) X is a T-rigid subcategory if and only if the class {πG(X)XX} has property ((S) [9, Definition 2.7(1)]).

    Proof. 1). By Remark 3.3, there exists an E-triangle:

    Ω(T1)fXΩ(T0)X

    When we apply the functor G to it, there exists an exact sequence G(Ω(T1))G(Ω(T0))G(X)0. By Lemma 3.4(1), G(Ω(Ti)) is projective in mod Ω(T)_. So the above exact sequence is the desired projective presentation.

    2). For any X0X, using the similar proof to [9, Lemma 4.1], we get the following commutative diagram

    where α=HommodΩT_(πG(X),G(X0)). By Lemma 3.4(2), both the left and right vertical maps are isomorphisms. Hence the set {πG(X)XX} has property ((S) iff α is epic iff HomB_(fX,X0) is epic iff X is a T-rigid subcategory by [10, Lemma 3.6].

    Lemma 3.6. Let X be a T-rigid subcategory and T1 a subcategory of T. Then XT1 is a T-rigid subcategory iff E(T1,X)=0.

    Proof. For any MXT1, then M=XT1 for XX and T1T1. Let h: XT be a left T-approximation of X and y: T1Σ(X) for XX any morphism. Then there exists the following commutative diagram

    with P1P, f=(h001) and β=(i000i1).

    When XT1 is a T-rigid subcategory, we can get a morphism g: XT1Σ(X)Σ(T1) such that βg=(10)y(0 1)f. i.e., b: T1I such that y=i0b. So E(T1,X)=0 and then E(T1,X)=0.

    Let γ=(r11r12r21r22): TT1Σ(X)Σ(T1) be a morphism. As X is T-rigid, r11h: XΣ(X) factors through i0. Since E(T,X)=0, r12: T1Σ(X) factors through i0. As T is rigid, the morphism r21h: XTΣ(T1) factors through i1, and the morphism r22: T1Σ(T1) factors through i1. So the morphism γf can factor through β=(i000i1). Therefore XT1 is an T-rigid subcategory.

    For the definition of τ-rigid pair in an additive category, we refer the readers to see [9, Definition 2.7].

    Lemma 3.7. Let U be a class of T-rigid subcategories and V a class of τ-rigid pairs of modΩ(T)_. Then there exists a bijection φ: UV, given by : X(G(X),Ω(T)Ω(X)).

    Proof. Let X be T-rigid. By Lemma 3.5, G(X) is a τ-rigid subcategory of mod Ω(T)_.

    Let YΩ(T)Ω(X), then there exists X0X such that Y=Ω(X0). Consider the E-triangle Ω(X0)PX0 with PP. XX, applying HomB(,X) yields an exact sequence HomB(P,X)HomB(Ω(X0),X)E(X0,X)0. Hence in B_=B/T, HomB_(Ω(X0),X)E(X0,X).

    By Remark 3.3, for X0, there is an E-triangle Ω(T1)Ω(T2)X0 with T1, T2T. Applying HomB_(,X), we obtain an exact sequence HomB_(Ω(T2),X)HomB_(Ω(T1),X)E(X0,X)E(Ω(T2),X). By [10, Lemma 3.6], HomB_(Ω(T2),X)HomB_(Ω(T1),X) is epic. Moreover, Ω(T2)_ is projective in B_ by [4, Proposition 4.8]. So E(Ω(T2),X)=0. Thus E(X0,X)=0. Hence XX,

    G(X)(Y)=HomB_(Ω(X0),X)=0.

    So (G(X),Ω(T)Ω(X)) is a τ-rigid pairs of modΩ(T)_.

    We will show φ is a surjective map.

    Let (N,σ) be a τ-rigid pair of modΩ(T)_. NN, consider the projective presentation

    P1πNP0N0

    such that the class {πN|NN} has Property (S). By Lemma 3.4, there exists a unique morphism fN: Ω(T1)Ω(T0) in Ω(T)_ satisfying G(fN)=πN and G(Cone(fN))N. Following from Lemma 3.5, X1:= {cone(fN)NN} is a T-rigid subcategory.

    Let X=X1Y, where Y={TTΩ(T)σ}. For any T0Y, there is an E-triangle Ω(T0)PT0 with PP. For any Cone(fN)X1, applying HomB_(,Cone(fN)), yields an exact sequence HomB_(Ω(T0),Cone(fN))E(T0,Cone(fN))E(P,Cone(fN))=0. Since (N,σ) is a τ-rigid pair, HomB_(Ω(T0),Cone(fN))=G(Cone(fM))(Ω(T0))=0. So E(T0,Cone(fN))=0. Due to Lemma 3.6, X=X1Y is T-rigid. Since YT, we get G(Y)=HomB_(,T)Ω(T)=0 by [4, Lemma 4.7]. So G(X)=G(X1)=N.

    It is straightforward to check that Ω(T)Ω(X1)=0. Let XΩ(T)Ω(X), then XΩ(T) and XΩ(X)=Ω(X1)σ. So we can assume that X=Ω(X1)E, where Eσ. Then Ω(X1)EΩ(T). Since EΩ(T), we get Ω(X1)Ω(T)Ω(X1)=0. So Ω(T)Ω(X)σ. Clearly, σΩ(T). Moreover, σΩ(X). So σΩ(T)Ω(X). Hence Ω(T)Ω(X)=σ. Therefore φ is surjective.

    Lastly, φ is injective by the similar proof method to [9, Proposition 4.2].

    Therefore φ is bijective.

    Lemma 3.8. Let T be a rigid subcategory and AaBCδ an E-triangle satisfying [¯T](C,Σ(A))=[T](C,Σ(A)). If there exist an E-extension γE(T,A) and a morphism t: CT with TT such that tγ=δ, then the E-triangle AaBCδ splits.

    Proof. Applying HomB(T,) to the E-triangle AIiΣ(A)α with II, yields an exact sequence HomB(T,A)E(T,X)E(T,I)=0. So there is a morphism dHomB(T,Σ(A)) such that γ=dα. So δ=tγ=tdα=(dt)α. So we have a diagram which is commutative:

    Since [¯T](C,Σ(A))=[T](C,Σ(A)) and dt[T](C,Σ(A)), dt can factor through i. So 1A can factor through a and the result follows.

    Now, we will show our main theorem, which explains the relation between T-cluster tilting subcategories and support τ-tilting pairs of modΩ(T)_.

    The subcategory X is called a preimage of Y by G if G(X)=Y.

    Theorem 3.9. There is a correspondence between the class of T-cluster tilting subcategories of B and the class of support τ-tilting pairs of modΩ(T)_ such that the class of preimages of support τ-tilting subcategories is contravariantly finite in B.

    Proof. Let φ be the bijective map, such that X(G(X),Ω(TΩ(X))), where G is the restricted Yoneda functor defined in the argument above Lemma 3.4.

    1). The map φ is well-defined.

    If Xis T-cluster tilting, then X is T-rigid. So φ(X) is a τ-rigid pair of modΩ(T)_ by Lemma 3.7. Therefore Ω(T)Ω(X)KerG(X). Assume Ω(T0)Ω(T) is an object of KerG(X). Then HomB_(Ω(T0),X)=0. Applying HomB_(,X) with XX to Ω(T0)PT0 with PP, yields an exact sequence

    HomB_(P,X)HomB_(Ω(T),X)E(T0,X)0.

    Hence we get E(T0,X)HomB_(Ω(T0),X)=0.

    Applying HomB(T0,) to XIΣ(X), we obtain

    (3.1)      [¯T](T0,Σ(X))=[T](T0,Σ(X)).

    For any ba: XaRbΣ(T0) with RT, as T is rigid, we get a commutative diagram:

    Hence we get (3.2)[¯T](X,Σ(T0))=[T](X,Σ(T0)).

    By the equalities (3.1) and (3.2) and X being a T-rigid subcategory, we obtain

    [¯T](X,Σ(XT0))=[T](X,Σ(XT0)) and [¯T](XT0,Σ(X))=[T](XT0,Σ(X)).

    As X is T-cluster tilting, we get XT0X. So T0X. And thus Ω(T0)Ω(T)Ω(X). Hence KerG(X)=Ω(T)Ω(X).

    Since X is functorially finte, similar to [6, Lemma 4.1(2)], Ω(T)Ω(T), we can find an E-triangle Ω(T)fX1X2, where X1, X2X and f is a left X-approximation. Applying G, yields an exact sequence

    G(Ω(R))G(f)G(X1)G(X2)0.

    Thus we get a diagram which is commutative, where HomB_(f,X) is surjective.

    By Lemma 3.4, the morphism G(f) is surjective. So G(f) is a left G(X)-approximation and (G(X),Ω(T)Ω(X)) is a support τ-tilting pair of modΩ(T)_ by [3, Definition 2.12].

    2). φ is epic.

    Assume (N,σ) is a support τ-tilting pair of modΩ(T)_. By Lemma 3.7, there is a T-rigid subcategory X satisfies G(X)=N. So Ω(T)Ω((T)), there is an exact sequence G(Ω(T))αG(X3)G(X4)0, such that X3, X4X and α is a left G(X)-approximation. By Yoneda's lemma, we have a unique morphism in modΩ((T))_:

    β: Ω(T)X3 such that α=G(β) and G(cone(β))G(X4).

    Moreover, XX, consider the following commutative diagram

    By Lemma 3.4, G() is surjective. So the map HomB_(β,X) is surjective.

    Denote Cone(β) by YR and Xadd{YRΩ(T)Ω(T)} by ˜X.

    We claim ˜X is T-rigid.

    (I). Assume a: YRa1T0a2Σ(X) with T0T and XX. Consider the following diagram:

    Since X is T-rigid, f: X3I such that aγ=if. So there is a morphism g:Ω(T)X making the upper diagram commutative. Since HomB_(β,X) is surjective, g factors through β. Hence a factors through i, i.e., [¯T](YR,Σ(X))=[T](YR,Σ(X)).

    (II). For any morphism b: Xb1T0b2Σ(YR) with T0T and XX. Consider the following diagram:

    By [3, Lemma 5.9], RΣ(X3)Σ(YT) is an E-triangle. Because T is rigid, b2 factors through γ1. By the fact that X is T-rigid, b=b2b1 can factor through iX. Since γ1iX=iY, we get that b factors through iY. So [¯T](X,Σ(YT))=[T](X,Σ(YT)).

    By (I) and (II), we also obtain [¯T](YT,Σ(YT))=[T](YT,Σ(YT)).

    Therefore ˜X=Xadd{YTΩ(T)Ω(T)} is T-rigid.

    Let MB satisfying [¯T](M,Σ(˜X))=[T](M,Σ(˜X)) and [¯T](˜X,ΣM)=[T](˜X,ΣM). Consider the E-triangle:

    Ω(T5)fΩ(T6)gM

    where T5, T6T. By the above discussion, there exist two E-triangles:

    Ω(T6)uX6vY6 and Ω(T5)uX5vY5.

    where X5, X6X, u and u are left X-approximations of Ω(T6), Ω(T5), respectively. So there exists a diagram of E-triangles which is commutative:

    We claim that the morphism x=uf is a left X-approximation of Ω(T5). In fact, let XX and d: Ω(T5)X, we can get a commutative diagram of E-triangles:

    where PP. By the assumption, [¯T](M,Σ(X))=[T](M,Σ(X)). So d2h factors through iX. By Lemma 2.3, d factors through f. Thus f1: Ω(T6)X such that d=f1f. Moreover, u is a left X-approximation of Ω(T6). So u1: X6X such that f1=u1u. Thus d=f1f=u1uf=u1x. So x=uf is a left X-approximation of Ω(T5).

    Hence there is a commutative diagram:

    By [3, Corollary 3.16], we get an E-triangle X6(yλ)NX5Y5xδ5

    Since u is a left X-approximation of Ω(T5), there is also a commutative diagram with PP:

    such that δ5=tμ. So xδ5=xtμ=txμ. By Lemma 3.8, the E-triangle xδ5 splits. So NX5X6Y5˜X. hence N˜X.

    Similarly, consider the following commutative diagram with PP:

    and the E-triangle MNYgδ6. Then t: YT6 such that δ6=tδ. Then gδ6=gtδ=t(gδ). Since [¯T](˜X,ΣM)=[T](˜X,ΣM), the E-triangle gδ6 splits by Lemma 3.5 and M is a direct summands of N. Hence M˜X.

    By the above, we get ˜X is a T-cluster tilting subcategory.

    By the definition of YR, G(YR)G(X). So G(˜X)G(X)N. Moreover, σ=Ω(T)Ω(X)Ω(T)Ω(˜X) and Ω(T)Ω(˜X)kerG(X)=σ. So Ω(T)Ω(˜X)=σ. Hence φ is surjective.

    3). φ is injective following from the proof of Lemma 3.7.

    By [4, Proposition 4.8 and Fact 4.13], B_modΩ(T)_. So it is easy to get the following corollary by Theorem 3.9:

    Corollary 3.10. Let X be a subcategory of B.

    1) X is T-rigid iff X_ is τ-rigid subcategory of B_.

    2) X is T-cluster tilting iff X_ is support τ-tilting subcategory of B_.

    If let H=CoCone(T,T), then H can completely replace B and draw the corresponding conclusion by the proof Lemma 3.7 and Theorem 3.9, which is exactly [12, Theorem 3.8]. If let B is a triangulated category, then Theorem 3.9 is exactly [9, Theorem 4.3].

    This research was supported by the National Natural Science Foundation of China (No. 12101344) and Shan Dong Provincial Natural Science Foundation of China (No.ZR2015PA001).

    The authors declare they have no conflict of interest.



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