Fiscal policy and debt dynamics in developing countries
AbstractUsing a new tax database for 28 countries and a variety of econometric methods, this paper contributes to the debate on the effects of fiscal policy on economic activity in a number of ways. The analysis finds that tax cuts have a stimulative effect on economic growth in developing countries. Lowering the personal income tax rate by 1 percentage point, or cutting revenues by 1 gross domestic product of gross domestic product increases gross domestic product by 0.3-0.4 percent on impact and 0.8 percent in the long run. The author finds that cuts in personal income taxes are more effective in stimulating growth than cuts in corporate or valued added tax rates. The author incorporates debt dynamics into a fiscal vector autoregression model for a number of developing countries. Existing estimates of the effects of fiscal policy on growth use linear time-series methods, which may assess the effects of fiscal policy along a debt-path that is unsustainable. Incorporating the non-linear relationship between government expenditure, taxes, and debt alters estimates of the impact of fiscal policy on gross domestic product in several countries. In Brazil, for example, conventional time-series methods may overstate the effects of fiscal policy on gross domestic product, by ignoring the detrimental effects of debt accumulation.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 5666.
Date of creation: 01 May 2011
Date of revision:
Debt Markets; Taxation&Subsidies; Emerging Markets; Economic Theory&Research; Tax Law;
This paper has been announced in the following NEP Reports:
- NEP-ACC-2011-05-30 (Accounting & Auditing)
- NEP-ALL-2011-05-30 (All new papers)
- NEP-PBE-2011-05-30 (Public Economics)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Carlo Favero & Francesco Giavazzi & Jacopo Perego, 2011.
"Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy,"
407, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Carlo Favero & Francesco Giavazzi & Jacopo Perego, 2011. "Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy," IMF Economic Review, Palgrave Macmillan, vol. 59(4), pages 652-682, November.
- Carlo Favero & Francesco Giavazzi & Jacopo Perego, 2011. "Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy," NBER Working Papers 17272, National Bureau of Economic Research, Inc.
- Favero, Carlo A. & Giavazzi, Francesco & Perego, Jacopo, 2011. "Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy," CEPR Discussion Papers 8517, C.E.P.R. Discussion Papers.
- Marcello M. EstevÃ£o & Issouf SamakÃ©, 2013. "The Economic Effects of Fiscal Consolidation with Debt Feedback," IMF Working Papers 13/136, International Monetary Fund.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).
If references are entirely missing, you can add them using this form.