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Fiscal policy and economic growth: Empirical evidence from the European Union

Author

Listed:
  • Dimitrios Paparas

    () (Harper Adams University, UK)

  • Christian Richter

    () (German University in Cairo, Egypt)

Abstract

The role of Fiscal policy in the long run growth process has been crucial in macroeconomics since the appearance of endogenous growth models. Additionally, a significant debate among economists involves whether several types of spending or taxation enhance economic growth. The main objective of this paper is to highlight the relationship between fiscal policy and economic growth in the EU-15, and to make an attempt to determine which of the fiscal policy instruments enhance economic growth. We deployed panel data techniques and included both sides of budget, spending and taxation, in our regressions and used the most recent dataset data for fiscal variables from Eurostat. We made a new classification of public expenditures into homogeneous groups in order to reduce the explanatory variables and increase the efficiency of our model and results since we have data for only 14 years. In our empirical analysis we included OLS, fixed effects models, random effects models and GMM estimators, the Arellano and Bond (1991) and the Arellano and Bover (1995) - Blundell and Bond (1998) estimators. On the first round of our regressions we find a negative impact of spending on human capital accumulation on economic growth. Our empirical results also indicate that an increase in government spending on infrastructure has a significant positive impact on the economic growth of a country. Additionally, in our regressions the variable government spending on property rights protections include spending on defence and spending on public order safety. Our empirical results from the first round of regressions imply a strongly negative relationship between t hese two variables. However, on the second round of our regressions we aggregate defence spending from spending on property right protection and we did not find any relationship between economic growth and defence spending. Moreover, we found a non-significant relationship between government spending on social protection and economic growth. On the second round of regressions, when we allow for non-linear growth effects we find a positive relationship with deficits and economic growth, which is in contrast with Ricardian Equivalence. We also included the employment growth and business investment in our model because labour and capital are very important factors of production in growth models. In our empirical results we do not find a significant impact of employment on economic growth, but when we allow for non-linear growth effects we find a strongly positive impact. However, we found that gross fixed capital formation of the private sector as a percentage of GDP in both rounds of our regressions, has no significant impact on economic growth. Finally, our empirical results do not support any evidence of a relationship between openness and economic growth.

Suggested Citation

  • 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.
  • Handle: RePEc:inf:wpaper:2015.06
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    File URL: http://www.infer-research.net/files_publications/WP_2015_06_Paparas_Richter.pdf
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    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Christos Kollias † & George Manolas & Suzanna-Maria Paleologouc, 2004. "Military expenditure and government debt in greece: Some preliminary empirical findings," Defence and Peace Economics, Taylor & Francis Journals, vol. 15(2), pages 189-197, April.
    3. Steve Bond & Asli Leblebicioglu & Fabio Schiantarelli, 2010. "Capital accumulation and growth: a new look at the empirical evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(7), pages 1073-1099, November/.
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    Cited by:

    1. repec:nax:conyad:v:62:y:2017:i:3:p:1041-1057 is not listed on IDEAS
    2. Nazila Alinaghi & W. Robert Reed, 2016. "Taxes and Economic Growth in OECD Countries: A Meta-Analysis," Working Papers in Economics 16/37, University of Canterbury, Department of Economics and Finance.
    3. Nursini Nursini, 2017. "Effect of Fiscal Policy and Trade Openness on Economic Growth in Indonesia: 1990-2015," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 358-364.

    More about this item

    Keywords

    Panel Data. Fiscal Policy. Taxation. Government Expenditures.;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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