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Fiscal Deficit and its Effects on Economic Growth: Empirical evidence

Author

Listed:
  • Nexhat Kryeziu

    (Faculty of Management, Business and Economics, UBT -Higher Education Institution, Prishtina, Kosovo)

  • Egzon Hoxha

    (University of Prishtina, Prishtina, Kosovo)

Abstract

The main objective of this paper is to determine the effect of the deficit on economic growth for the Eurozone countries, using a panel data model for a period from 1995 to 2015, with a total of 257 observations. To conduct this study, the multiple linear regression model with the least-squares regression was used. In this regard, to test the data used in the model, diagnostic tests have been applied, such as the Durbin-Watson test which has helped to analyze theserial correlation, as well as the Breusch-Pagan to test for determining heteroskedasticity. The emerged results from the tests in the study prove that the model used has no heteroskedasticity as well as, the model shows no relation between serial correlations. The results presented in our study show that the variable deficit to GDP ratio, is statistically significant with a positive sign, and as a result, we have the growth of the deficit to GDP ratio have a positive effect on the EG. In addition to the fiscal deficit, the unemployment and the government bond yield,as independent variables, in relation to EG were used. Furthermore, there is contemporary literature used in this paper that speaks about the effects of fiscal deficit on the euro area in times of pandemic.In terms of policy recommendations, for the countries subject to this study it is suggested that the level of high and long-term deficits should be controlled because this situation with the continuously high level of fiscal deficit, could harmeconomic growth and create imbalances in other macroeconomic variables, especially at present taking into account the deteriorating situation as a result of the Covid-19 pandemic.

Suggested Citation

  • Nexhat Kryeziu & Egzon Hoxha, 2021. "Fiscal Deficit and its Effects on Economic Growth: Empirical evidence," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 10(1), pages 62-70, January.
    • Handle: RePEc:rbs:ijfbss:v:10:y:2021:i:1:p:62-70
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    References listed on IDEAS

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