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Threshold effects of fiscal policy on economic growth in developing countries

Author

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  • Slimani Salma

    (Department of Economics, Mohammed V Rabat –Agdal University, Faculty of Juridical, Economic and Social Sciences, Morocco)

  • El Abbassi Idriss

    (Department of Economics, Mohammed V Rabat –Agdal University, Faculty of Juridical, Economic and Social Sciences, Morocco)

  • Tounsi Said

    (Department of Economics, Mohammed V Rabat –Agdal University, Faculty of Juridical, Economic and Social Sciences, Morocco)

Abstract

We examine the relation between fiscal policy and economic growth for a panel of 40 developing countries over the period of 1990 to 2012 using eight macroeconomic variables: real GDP, budget deficit, current government spending, national saving, inflation rate, total investment, public debt, and current account balance. The study documents a double threshold effect of the fiscal balance. The first one is at a level of the deficit around 4.8% of GDP; the second one is at the fiscal surplus level of 3.2% of GDP meaning that economic growth would be negatively affected when exceeding these two different levels. The result also show that the sign of the relation between budget deficit and economic growth is conditioned by the level of total investment i.e. only for total investment higher than 23%, there exists a positive relation. However, it becomes negative, when investment falls below this threshold.

Suggested Citation

  • Slimani Salma & El Abbassi Idriss & Tounsi Said, 2016. "Threshold effects of fiscal policy on economic growth in developing countries," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 4(3), pages 24-37, June.
    • Handle: RePEc:lrc:lareco:v:4:y:2016:i:3:p:24-37
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    2. H.R.A. Chamini Thilanka & J.G. Sri Ranjith, 2018. "The Impact of Public Debt on Private Investment: Sri Lankan Experience," International Journal of Business and Social Research, LAR Center Press, vol. 8(8), pages 1-20, August.
    3. Paul Alagidede & Jones Odei Mensah & Muazu Ibrahim, 2018. "Optimal Deficit Financing in a Constrained Fiscal Space in Ghana," African Development Review, African Development Bank, vol. 30(3), pages 291-303, September.
    4. Mwankemwa, Lusajo P. & Luvanda, Eliab, 2021. "Fiscal Deficit and its Threshold Effects on Inflation in Tanzania," African Journal of Economic Review, African Journal of Economic Review, vol. 10(1), December.

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    More about this item

    Keywords

    Developing countries; Economic growth; Fiscal deficit;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • O49 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Other

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