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Threshold Effects of Fiscal Policy on Economic Activity in Developing Countries

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  • Salma Slimani

    () (Ph.D. researcher, Department of economics, Mohammed V Rabat –Agdal University, Faculty of Juridical, Economic and Social Sciences, Morocco.)

Abstract

The aim of this paper is to investigate the relationship between fiscal policy and economic growth for a panel of 40 developing countries for the period 1990 – 2012 with a focus on a comparative analysis between Morocco and the panel. The variables used are real GDP, budget deficit, current government spending, national saving, inflation rate, total investment, public debt and current account balance. The main findings are: First, there is evidence of a double threshold effect of the fiscal balance. When exceeding a budget deficit level of 4.8% of GDP or a fiscal surplus level of 3.2% of GDP, economic growth is negatively affected. Second, the sign of the relationship between budget deficit and economic growth is conditioned by the level of total investment. For values of total investment higher than 23%, it follows that there is a positive relationship. However, it becomes negative, when investment falls below this threshold. Third, from Morocco’s perspective, analysis of threshold effects suggested that above 4.8% of budget deficit, average growth rate falls by 2.1%, while median growth falls by 1.5%.

Suggested Citation

  • Salma Slimani, 2016. "Threshold Effects of Fiscal Policy on Economic Activity in Developing Countries," International Journal of Business and Social Research, LAR Center Press, vol. 6(3), pages 20-37, March.
  • Handle: RePEc:lrc:larijb:v:6:y:2016:i:3:p:
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    More about this item

    Keywords

    Developing countries; economic growth; fiscal deficit; investment; threshold effects.;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • H39 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Other
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O49 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Other

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