IDEAS home Printed from https://ideas.repec.org/a/spr/weltar/v160y2024i1d10.1007_s10290-023-00494-5.html
   My bibliography  Save this article

Growth effects of budgetary fiscal variables in a panel of middle-income countries

Author

Listed:
  • Sultan Hafeez Rahman

    (BRAC University)

  • Muhammad Shahadat Hossain Siddiquee

    (BRAC University
    University of Dhaka)

Abstract

This paper assesses the growth-enhancing and growth-retarding effects of different budgetary fiscal variables using a balanced panel of 32 middle-income countries for the time period of 2000–2017. Much of previous research requires to be re-evaluated as it ignores the biases associated with either incomplete or wrong specification, or both, of the budget constraint and the money supply. This paper addresses these gaps and obtains more unbiased, consistent and efficient estimates for the fiscal variables, using both static and dynamic panel econometric techniques. Specifically, this paper finds that (1) larger tax and non-tax revenues retard economic growth; (2) higher allocation to public capital expenditure appears to have positive and significant effect on growth; (3) fiscal deficit appears to have neutral-growth effects; and (4) controlling broad money supply corrects for biases in the orthogonal specification.

Suggested Citation

  • Sultan Hafeez Rahman & Muhammad Shahadat Hossain Siddiquee, 2024. "Growth effects of budgetary fiscal variables in a panel of middle-income countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 160(1), pages 145-168, February.
  • Handle: RePEc:spr:weltar:v:160:y:2024:i:1:d:10.1007_s10290-023-00494-5
    DOI: 10.1007/s10290-023-00494-5
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10290-023-00494-5
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.

    File URL: https://libkey.io/10.1007/s10290-023-00494-5?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Elliott, J W, 1975. "The Influence of Monetary and Fiscal Actions on Total Spending: The St. Louis Total Spending Equation Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 7(2), pages 181-192, May.
    2. Christophe Kamps, 2005. "The Dynamic Effects of Public Capital: VAR Evidence for 22 OECD Countries," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(4), pages 533-558, August.
    3. Martin Feldstein, 1974. "Incidence of a Capital Income Tax in a Growing Economy with Variable Savings Rates," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(4), pages 505-513.
    4. Serena Lamartina & Andrea Zaghini, 2011. "Increasing Public Expenditure: Wagner's Law in OECD Countries," German Economic Review, Verein für Socialpolitik, vol. 12(2), pages 149-164, May.
    5. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-1395, November.
    6. Gupta, Sanjeev & Clements, Benedict & Baldacci, Emanuele & Mulas-Granados, Carlos, 2005. "Fiscal policy, expenditure composition, and growth in low-income countries," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 441-463, April.
    7. Adam, Christopher S. & Bevan, David L., 2005. "Fiscal deficits and growth in developing countries," Journal of Public Economics, Elsevier, vol. 89(4), pages 571-597, April.
    8. Benos, Nikos, 2009. "Fiscal policy and economic growth: empirical evidence from EU countries," MPRA Paper 19174, University Library of Munich, Germany.
    9. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
    10. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-544, September.
    11. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 126-150, October.
    12. Robert J. Barro & Xavier Sala-I-Martin, 1992. "Public Finance in Models of Economic Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(4), pages 645-661.
    13. Martin S. Feldstein, 1974. "Tax Incidence in a Growing Economy with Variable Factor Supply," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 88(4), pages 551-573.
    14. Leonel Muinelo‐Gallo & Oriol Roca‐Sagalés, 2011. "Economic Growth And Inequality: The Role Of Fiscal Policies," Australian Economic Papers, Wiley Blackwell, vol. 50(2-3), pages 74-97, September.
    15. Cecilia García‐Peñalosa & Stephen J. Turnovsky, 2007. "Growth, Income Inequality, and Fiscal Policy: What Are the Relevant Trade‐offs?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2‐3), pages 369-394, March.
    16. Nguyen Phuc Canh, 2018. "The effectiveness of fiscal policy: contributions from institutions and external debts," Journal of Asian Business and Economic Studies, Emerald Group Publishing Limited, vol. 25(1), pages 50-66, May.
    17. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
    18. Koester, Reinhard B & Kormendi, Roger C, 1989. "Taxation, Aggregate Activity and Economic Growth: Cross-Country Evidence on Some Supply-Side Hypotheses," Economic Inquiry, Western Economic Association International, vol. 27(3), pages 367-386, July.
    19. Sylwester, Kevin, 2000. "Income inequality, education expenditures, and growth," Journal of Development Economics, Elsevier, vol. 63(2), pages 379-398, December.
    20. Mendoza, Enrique G. & Milesi-Ferretti, Gian Maria & Asea, Patrick, 1997. "On the ineffectiveness of tax policy in altering long-run growth: Harberger's superneutrality conjecture," Journal of Public Economics, Elsevier, vol. 66(1), pages 99-126, October.
    21. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    22. Wu, Shih-Ying & Tang, Jenn-Hong & Lin, Eric S., 2010. "The impact of government expenditure on economic growth: How sensitive to the level of development?," Journal of Policy Modeling, Elsevier, vol. 32(6), pages 804-817, November.
    23. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 485-512, December.
    24. Paul Cashin, 1995. "Government Spending, Taxes, and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 237-269, June.
    25. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    26. Barry Eichengreen & Donghyun Park & Kwanho Shin, 2018. "The Landscape of Economic Growth: Do Middle-Income Countries Differ?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(4), pages 836-858, March.
    27. Sugata Ghosh & Andros Gregoriou, 2008. "The composition of government spending and growth: is current or capital spending better?," Oxford Economic Papers, Oxford University Press, vol. 60(3), pages 484-516, July.
    28. Folster, Stefan & Henrekson, Magnus, 2001. "Growth effects of government expenditure and taxation in rich countries," European Economic Review, Elsevier, vol. 45(8), pages 1501-1520, August.
    29. Kimaro, Edmund Lawrence & Keong, Choong Chee & Sea, Lau Lin, 2017. "Government Expenditure, Efficiency and Economic Growth: A Panel Analysis of Sub Saharan African Low Income Countries," African Journal of Economic Review, African Journal of Economic Review, vol. 5(2), July.
    30. Bharat Kolluri & Michael Panik & Mahmoud Wahab, 2000. "Government expenditure and economic growth: evidence from G7 countries," Applied Economics, Taylor & Francis Journals, vol. 32(8), pages 1059-1068.
    31. Perotti, Roberto, 2005. "Estimating the Effects of Fiscal Policy in OECD Countries," CEPR Discussion Papers 4842, C.E.P.R. Discussion Papers.
    32. Helmi Hamdi & Rashid Sbia, 2013. "Fiscal Policy And Economic Growth In PIIGS Countries: An Empirical Assessment," Post-Print halshs-01902785, HAL.
    33. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    34. Zaidi Sattar, 1993. "Public expenditure and economic performance: A comparison of developed and low‐income developing economies," Journal of International Development, John Wiley & Sons, Ltd., vol. 5(1), pages 27-49, January.
    35. Auerbach, Alan J & Kotlikoff, Laurence J, 1987. "Evaluating Fiscal Policy with a Dynamic Simulation Model," American Economic Review, American Economic Association, vol. 77(2), pages 49-55, May.
    36. Syed Jawaid & Abdul Waheed, 2011. "Effects of Terms of Trade and its Volatility on Economic Growth: A Cross Country Empirical Investigation," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 18(2), pages 217-229, December.
    37. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
    38. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November.
    39. Samargandi, Nahla & Fidrmuc, Jan & Ghosh, Sugata, 2015. "Is the Relationship Between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle-Income Countries," World Development, Elsevier, vol. 68(C), pages 66-81.
    40. Jha, Shikha & Mallick, Sushanta K. & Park, Donghyun & Quising, Pilipinas F., 2014. "Effectiveness of countercyclical fiscal policy: Evidence from developing Asia," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 82-98.
    41. Shahid Ali & Somia Irum & Asghar Ali, 2008. "Whether Fiscal Stance or Monetary Policy is Effective for Economic Growth in Case of South Asian Countries?," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 47(4), pages 791-799.
    42. Arusha Cooray, 2009. "Government Expenditure, Governance and Economic Growth," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 51(3), pages 401-418, September.
    43. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    44. Mr. Qing Wang & Mr. Ugo Fasano-Filho, 2001. "Fiscal Expenditure Policy and Non-Oil Economic Growth: Evidence from GCC Countries," IMF Working Papers 2001/195, International Monetary Fund.
    45. Niloy Bose & M. Emranul Haque & Denise R. Osborn, 2007. "Public Expenditure And Economic Growth: A Disaggregated Analysis For Developing Countries," Manchester School, University of Manchester, vol. 75(5), pages 533-556, September.
    46. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sefa Awaworyi Churchill & Mehmet Ugur & Siew Ling Yew, 2017. "Does Government Size Affect Per-Capita Income Growth? A Hierarchical Meta-Regression Analysis," The Economic Record, The Economic Society of Australia, vol. 93(300), pages 142-171, March.
    2. Hammed Adetola Adefeso, 2016. "Productive Government Expenditure and Economic Performance in sub-Saharan Africa: An Empirical Investigation," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 19(2), pages 1-18, November.
    3. Tuan T. Chu & Jens Hölscher & Dermot McCarthy, 2020. "The impact of productive and non-productive government expenditure on economic growth: an empirical analysis in high-income versus low- to middle-income economies," Empirical Economics, Springer, vol. 58(5), pages 2403-2430, May.
    4. António Afonso & Juan Alegre, 2011. "Economic growth and budgetary components: a panel assessment for the EU," Empirical Economics, Springer, vol. 41(3), pages 703-723, December.
    5. repec:ebl:ecbull:v:8:y:2007:i:4:p:1-7 is not listed on IDEAS
    6. Dimitrios Paparas & Christian Richter, 2015. "Fiscal policy and economic growth: Empirical evidence from the European Union," Working Papers 2015.06, International Network for Economic Research - INFER.
    7. Menescal, Lucas & Alves, José, 2024. "Optimal threshold taxation: An empirical investigation for developing economies," The Journal of Economic Asymmetries, Elsevier, vol. 29(C).
    8. Eleftherios Goulas & Athina Zervoyianni, 2012. "Growth, Deficits and Uncertainty in a Panel of 28 Countries," Working Paper series 52_12, Rimini Centre for Economic Analysis.
    9. Halit Yanikkaya & Taner Turan, 2018. "Tax Structure And Economic Growth: Do Differences In Income Level And Government Effectiveness Matter?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(01), pages 217-237, May.
    10. Durusu-Ciftci, Dilek & Gokmenoglu, Korhan K. & Yetkiner, Hakan, 2018. "The heterogeneous impact of taxation on economic development: New insights from a panel cointegration approach," Economic Systems, Elsevier, vol. 42(3), pages 503-513.
    11. Sultan Hafeez Rahman & Muhammad Shahadat Hossain Siddiquee, 2022. "Short- and long-run growth effects of fiscal policy in Bangladesh," SN Business & Economics, Springer, vol. 2(9), pages 1-21, September.
    12. Hajamini, Mehdi & Falahi, Mohammad Ali, 2018. "Economic growth and government size in developed European countries: A panel threshold approach," Economic Analysis and Policy, Elsevier, vol. 58(C), pages 1-13.
    13. James Alm & Asmaa El-Ganainy, 2013. "Value-added taxation and consumption," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(1), pages 105-128, February.
    14. Juan Marroquín-Arreola & Humberto Ríos Bolívar, 2021. "Decisiones fiscales, crecimiento económico y desigualdad del ingreso," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(4), pages 1-16, Octubre -.
    15. Ho Thuy Ai & Ping, Lin, 2018. "Impacts of fiscal policy on economic growth: Another look from institutional perspective," Economics Discussion Papers 2018-45, Kiel Institute for the World Economy (IfW Kiel).
    16. Gian Maria Milesi-Ferretti & Nouriel Roubini, 1995. "Growth Effects of Income and Consumption Taxes: Positive and Normative Analysis," Working Papers 95-18, New York University, Leonard N. Stern School of Business, Department of Economics.
    17. Dimitrios PAPARAS & Christian RICHTER & Alexandros PAPARAS, 2015. "Fiscal Policy and Economic Growth, Empirical Evidence in European Union," Turkish Economic Review, KSP Journals, vol. 2(4), pages 239-268, December.
    18. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November.
    19. Richard Kneller & Norman Gemmell, 2002. "Fiscal Policy, Growth and Convergence in Europe," European Economy Group Working Papers 14, European Economy Group.
    20. Gonzales, Ivonne & Martner Fanta, Ricardo & Podestá, Andrea, 2013. "Políticas fiscales para el crecimiento y la igualdad," Macroeconomía del Desarrollo 5372, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    21. Emilian DOBRESCU, 2016. "Controversies over the Size of the Public Budget," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 5-34, December.

    More about this item

    Keywords

    Growth; Fiscal; Middle-income countries; Orthogonal; Structural;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development
    • F68 - International Economics - - Economic Impacts of Globalization - - - Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:weltar:v:160:y:2024:i:1:d:10.1007_s10290-023-00494-5. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.