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The Effect of Fiscal Deficits on Economic Growth: Evidence from Eurozone Countries

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  • Vese Qehaja-Kekae
  • Driton Qehaja
  • Arber Hoti

Abstract

Over the last decade, no issue in economic policy has caused greater controversy than the effects of fiscal deficits on economic growth. Fiscal deficits have been a significant cause of worry for many developed countries, notably the Eurozone. Even if short stimulants were justified, particularly after the crises of 2008-2009 in response to the global financial crisis, they have resulted in chronic fiscal deficits, growing debt, and depleted fiscal buffers in the medium to long term. This paper investigates, using STATA econometrics, how fiscal deficits affect the economic growth rate in Eurozone Countries. We use annual data for Eurozone countries from 2001 to 2020, totalling 346 observations. The study relied on secondary data from the World Bank's databases. To estimate the effect of fiscal deficits on economic growth, we used a random effect model. The dependent variable GDP growth was analysed through the effect of Public and publicly guaranteed debt from publicly issued or privately placed bonds Inflation, GDP deflator, Unemployment, Foreign direct investment, net inflows as a percentage of GDP, Domestic credit to the private sector as a percentage of GDP. Our research findings reveal that the variable Inflation and Domestic credit to the private sector affect GDP growth and are statistically significant.

Suggested Citation

  • Vese Qehaja-Kekae & Driton Qehaja & Arber Hoti, 2023. "The Effect of Fiscal Deficits on Economic Growth: Evidence from Eurozone Countries," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 3-18.
    • Handle: RePEc:bas:econst:y:2023:i:6:p:3-18
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    Cited by:

    1. Olesea Speian, 2024. "Debt Dynamics under Uncertainty: Evidence from the Republic of Moldova," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 50-63.

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    More about this item

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H89 - Public Economics - - Miscellaneous Issues - - - Other

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