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Fiscal spending and economic performance : some stylized facts

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  • Carrere, Celine
  • de Melo, Jaime

Abstract

This paper complements the cross-country approach by examining the correlates of growth acceleration in per capita gross domestic product around"significant"public expenditure episodes by reorganizing the data around turning points, or events. The authors define a growth event as an increase in average per capita growth of at least 2 percentage points sustained for 5 years. A fiscal event is an increase in the annual growth rate of primary fiscal expenditure of approximately 1 percentage point sustained for 5 years and not accompanied by an aggravation of the fiscal deficit beyond 2 percent of gross domestic product. These definitions of events are applied to a database of 140 countries (118 developing countries) for 1972-2005. After controlling for the growth-inducing effects of positive terms-of-trade shocks and of trade liberalization reform, probit estimates indicate that a growth event is more likely to occur in a developing country when surrounded by a fiscal event. Moreover, the probability of occurrence of a growth event in the years following a fiscal event is greater the lower is the associated fiscal deficit, confirming that success of a growth-oriented fiscal expenditure reform hinges on a stabilized macroeconomic environment (through a limited primary fiscal deficit).

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4452.

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Date of creation: 01 Dec 2007
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Handle: RePEc:wbk:wbrwps:4452

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Keywords: Public Sector Expenditure Analysis&Management; Fiscal Adjustment; Economic Conditions and Volatility; Debt Markets; Achieving Shared Growth;

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  1. Alberto Alesina & Guido Tabellini, 2005. "Why is Fiscal Policy Often Procyclical?," NBER Working Papers 11600, National Bureau of Economic Research, Inc.
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