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Growth, governance, and fiscal policy transmission channels in low-income countries

  • Baldacci, Emanuele
  • Hillman, Arye L.
  • Kojo, Naoko C.

Private investment is the principal transmission channel through which fiscal policy affects growth in high-income countries. In low-income countries, governance and also other considerations suggest that the primary channel is factor productivity. Empirical results reported in this paper confirm this expectation: in low-income countries, factor productivity is some four times more effective than investment as a channel for increasing growth through fiscal policy. Although the private investment response to fiscal contraction may be minor, high-deficit, low-income countries can nonetheless benefit from a reduction in unsustainable fiscal deficits because of governance-related factor productivity responses that increase growth.

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Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 20 (2004)
Issue (Month): 3 (September)
Pages: 517-549

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Handle: RePEc:eee:poleco:v:20:y:2004:i:3:p:517-549
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505544

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