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Fiscal policy and TFP in the OECD : Measuring direct and indirect effects

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  • Gerdie Everaert

    (Sherppa, Ghent University)

  • Freddy Heylen

    (Sherppa, Ghent University)

  • Ruben Schoonackers

    (Research Department, NBB)

Abstract

This paper analyzes the direct and indirect effects of fiscal policy on total factor productivity (TFP) in a panel of OECD countries over the period 1970-2012. Our contribution is twofold. First, when estimating the impact of fiscal policy on TFP from a production function approach, we identify the worldwide available level of technology by exploiting the observed strong cross-sectional dependence between countries instead of using ad hoc proxies for technology. Second, next to direct effects, we allow for indirect effects of fiscal policy by modelling the access of countries to worldwide available technology as a function of fiscal policy and other variables. Empirically, we propose and implement a non-linear version of the Common Correlated Effects Pooled (CCEP) estimator of Pesaran (2006). The estimation results show that through the direct channel budget deficits harm TFP. A shift towards productive expenditures has a strong positive impact on TFP, whereas a shift towards social transfers reduces TFP. Through the indirect channel, significant positive effects on a country's access to global technology come from reducing the statutory corporate tax rate and from reducing barriers to trade.

Suggested Citation

  • Gerdie Everaert & Freddy Heylen & Ruben Schoonackers, 2014. "Fiscal policy and TFP in the OECD : Measuring direct and indirect effects," Working Paper Research 274, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:201411-274
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    More about this item

    Keywords

    Fiscal policy; TFP; Unobserved Common Factors; Panel Data;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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