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Growth, Deficits and Uncertainty in a Panel of 28 Countries

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  • Eleftherios Goulas

    ()
    (Department of Economics, University of Patras, Greece)

  • Athina Zervoyianni

    ()
    (Department of Economics, University of Patras, Greece)

Abstract

We examine the relationship between fiscal deficits and per-capita income growth in a panel of 28 European countries, allowing for perceived risks, in terms of fiscal sustainability, associated with additional government spending. Such risks are proxied by the conditional variability of manufacturing production and stock market returns and by the unconditional variability of two survey-based economic-sentiment indicators. We find evidence of an asymmetric relationship, in that fiscal deficits give rise to adverse growth effects if they coincide with high uncertainty regarding the future prospects of the economy and no significant negative growth effects in the low-uncertainty case.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 52_12.

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Date of creation: Jul 2012
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Handle: RePEc:rim:rimwps:52_12

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Keywords: growth; fiscal policy; government budget constraint; uncertainty;

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