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Fiscal Spending and Economic Growth: Some Stylized Facts

  • Carrère, Céline
  • de Melo, Jaime

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).

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Article provided by Elsevier in its journal World Development.

Volume (Year): 40 (2012)
Issue (Month): 9 ()
Pages: 1750-1761

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Handle: RePEc:eee:wdevel:v:40:y:2012:i:9:p:1750-1761
Contact details of provider: Web page: http://www.elsevier.com/locate/worlddev

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