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Choosing the Optimal Tool for Fiscal Adjustment or Living under Fiscal Constraints: Panel Evidence from Selected OECD Countries

Author

Listed:
  • Cagri Esener

    (Bandirma Onyedi Eylul University, Faculty of Economics and Administrative Sciences, Bandirma-Balikesir, Turkey)

  • Brigitte Granville

    (Queen Mary University of London, School of Business and Management, London, UK)

  • Roman Matousek

    (Queen Mary University of London, School of Business and Management, London, UK)

Abstract

This article examines the long-run two-way causal relationship between government revenues and spending and their interaction with the yearly change in public debt for eighteen OECD countries by using annual data for 1976-2017 period. The empirical literature has mainly focused on the long run relationship between government expenditure and revenues or other single country time series while only a few studies have used panel causality analysis and none have investigated the link with the evolution of public debt ratios. The purpose of this paper is to present a dynamic model identifying the underlying relationships constituting the fiscal policy set-up in sample countries. We apply a robust dynamic panel causality methodology based on SUR systems and Wald tests with country specific bootstrap critical values. The study also aims to provide the basis for recommendations on the policy response to public finance challenges stemming from exogenous shocks like the global pandemic that began in 2020. By developing an enhanced analysis of the long-term causal relationship between taxation, spending and their interaction with changes in public debt, the study not only provides fresh insights into the sustainability and optimal design of fiscal adjustment efforts but also offers a country-specific schematization as a guide for policymaking.

Suggested Citation

  • Cagri Esener & Brigitte Granville & Roman Matousek, 2022. "Choosing the Optimal Tool for Fiscal Adjustment or Living under Fiscal Constraints: Panel Evidence from Selected OECD Countries," Economic Research Guardian, Weissberg Publishing, vol. 12(1), pages 2-29, June.
  • Handle: RePEc:wei:journl:v:12:y:2022:i:1:p:2-29
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal Policy; Government Revenue and Taxation; Government Expenditure; Public Debt; Bootstrap Panel Granger Causality;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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