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Growth, Governance, and Fiscal Policy Transmission Channels in Low-Income Countries

  • Naoko C. Kojo
  • Arye L. Hillman
  • Emanuele Baldacci

Private investment is the principal transmission channel through which fiscal policy affects growth in high-income countries. In low-income countries, governance and also other considerations suggest that the primary channel is factor productivity. Empirical results reported in this paper confirm this expectation: in low-income countries, factor productivity is some four times more effective than investment as a channel for increasing growth through fiscal policy. Although the private investment response to fiscal contraction may be minor, high-deficit, low-income countries can nonetheless benefit from a reduction in unsustainable fiscal deficits because of governance-related factor productivity responses that increase growth.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/237.

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Length: 39
Date of creation: 01 Dec 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/237
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