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Fiscal Spending and Economic Growth: Some Stylized Facts

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  • Carrère, Céline
  • de Melo, Jaime

Abstract

Using an “event analysis”, this paper complements the cross-country approach to the study of fiscal correlates of growth. Data on fiscal expenditures and growth for a database of 140 countries (118 developing countries) over 1972–2005 are reorganized around turning points providing a summary but encompassing description of “what is in the data”. For this sample, the probability of occurrence of a fiscal event is about 10%, and, the probability of a growth event once a fiscal event had occurred is around 26%. For developing countries, fiscal events followed by growth events occur under situations of (i) significantly lesser deficit, (ii) fewer resources devoted to non-interest general public services and (iii) shift in primary expenditures toward transport & communication. 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 is associate with a stabilized macroeconomic environment (through limited primary fiscal deficit).

Suggested Citation

  • Carrère, Céline & de Melo, Jaime, 2012. "Fiscal Spending and Economic Growth: Some Stylized Facts," World Development, Elsevier, vol. 40(9), pages 1750-1761.
  • Handle: RePEc:eee:wdevel:v:40:y:2012:i:9:p:1750-1761
    DOI: 10.1016/j.worlddev.2012.04.011
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    Cited by:

    1. Itchoko motande Mondjeli mwa ndjokou, 2015. "Too much public expenditures, less economic growt," Economics Bulletin, AccessEcon, vol. 35(3), pages 1985-1991.
    2. repec:spr:ijsaem:v:8:y:2017:i:2:d:10.1007_s13198-017-0616-6 is not listed on IDEAS
    3. Heshmati, Almas & Kim, Jungsuk, 2014. "A Survey of the Role of Fiscal Policy in Addressing Income Inequality, Poverty Reduction and Inclusive Growth," IZA Discussion Papers 8119, Institute for the Study of Labor (IZA).
    4. Hasnul, Al Gifari, 2015. "The effects of government expenditure on economic growth: the case of Malaysia," MPRA Paper 71254, University Library of Munich, Germany.
    5. Erasmo Papagni & Amedeo Lepore & Emanuele Felice & Anna Laura Baraldi & Maria Rosaria Alfano, 2018. "Public Investment and Growth Accelerations: The Case of Southern Italy, 1951-1995," EERI Research Paper Series EERI RP 2018/10, Economics and Econometrics Research Institute (EERI), Brussels.

    More about this item

    Keywords

    fiscal space; primary spending; growth acceleration; event analysis; developing countries;

    JEL classification:

    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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