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Growth, Deficits and Uncertainty: Theoretical Aspects and Empirical Evidence

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  • Eleftherios Goulas

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

  • Athina Zervoyianni

    ()
    (Department of Economics, University of Patras, Greece; The Rimini Centre for Economic Analysis (RCEA), Italy)

Abstract

We examine the relationship between fiscal deficits and per-capita income growth in a panel of 27 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. To help clarifying how fiscal variables impact on growth and to provide a point of reference for the interpretation of the empirical results a structural growth model is first identified. 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 prospects of the economy and no significant negative growth effects in the low-uncertainty case.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 53_13.

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Date of creation: Jun 2013
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Handle: RePEc:rim:rimwps:53_13

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

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