Transcript Slide 1

THE ACADEMY OF ECONOMIC STUDIES, BUCHAREST
DOCTORAL SCHOOL OF FINANCE AND BANKING
DISSERTATION PAPER
Fiscal Policy and Economic Growth
in European Union Countries
MSc Student: Zoescu Mihai
Supervisor: Professor Moisă Altăr
BUCHAREST, JULY 2003
1.Empirical Evidence
2.Theoretical Background
3.Methodology
4.Data
5.Estimation Results
6.Conclusions
1.Empirical Evidence
Ram (1986)
115 countries - 1960-1980 (Summers-Heston database)
estimations for each country based on time-series
positive impact of government size in 100 cases
positive impact of marginal government size in 98 cases
Barro (1991)
cross-country evidence on 98 countries, 1960-1985
(Summers-Heston database)
growth inversely related to the share of
government consumption in GDP
growth insignificantly related to the share of public investment
Folster and Henrekson (2000)
panel study on OECD sample, 1970–95 period
government consumption is significantly negatively related to growth
robust negative relationship between government expenditure and growth
Heitger (2001)
panel estimates for 21 OECD countries, 1960–2000
negative and statistically highly significant relation
government expenditures - economic growth
all subcategories of consumptive government expenditures:
significantly negative impact
2.Theoretical Background
Barro (1990)
endogenous growth

U   u (c)e  t dt
0
c1  1
u (c ) 
1
constant returns to a broad concept of capital
Y=Ak
constant returns to scale in k and g together but diminishing returns in k separately


c 1 
g
 1    1      
c 
k


1 g
     1
( g / y)   k 
h 
1
 1   g   h  g 1      

k

Growth
rate
0
20
40
60
80
100
Government (tax) share
3.Methodology
Panel data
Advantages:
double dimension
a better representation of the dynamic behavior of the individuals
takes into account individuals heterogeneity
data are numerous
the biases and the variance of estimation go to zero
are very precise
Inconveniences:
the existence of aberrant observations
missing observations
4.The Data
annual data for the EU countries from 1977 till 1997
Symbol
Variable name
GDP
Real gross domestic product growth per capita
GCONS
General government final consumption expenditure as percent of gross
domestic product
TEXP
Government total expenditure as percent of gross domestic product
REV
Government tax revenues as percent of gross domestic product
CAPF
Gross fixed capital formation as percent of gross domestic product
DGCONS GCONS change in percentage points
DTEXP
TEXP change in percentage points
DREV
REV change in percentage points
DCAPF
CAPF change in percentage points
Source : World Bank, 2002, World Development Indicators
5.Estimation Results
GDPnt  c  b1 DCAPFnt  b2 DREVnt  b3 DGCONSnt   nt
GDPnt ˆ c  b1 DCAPFnt  b2 DREVnt  b3 DTEXPnt   nt
(1)
(2)
Dep. var.
GDP
GDP
No. obs.
315
315
Const.
0.0235 (24.35)
0.0234 (23.12)
DGCONS
-1.2133 (-8.17)
-
DTEXP
-
-0.2848 (-5.49)
DREV
-0.1607 (-2.14)
-0.1235 (-1.48)
DCAPF
0.7271 (10.39)
0.6937 (8.99)
0.42
0.36
0.0167
0.0175
R2
GDP vs. DREV
GDP vs. DGCONS
.12
.08
.08
.04
.04
GDP
GDP
.12
.00
.00
-.04
-.08
-.08
-.04
-.04
.00
DREV
.04
.08
-.08
-.02
.00
.02
DGCONS
.04
GDP vs. DCAPF
GDP vs. TEXP
.12
.08
.08
.04
.04
GDP
GDP
.12
.00
.00
-.04
-.08
-.08
-.04
-.04
.00
DCAPF
.04
-.08
-.2
-.1
.0
TEXP
.1
.2
Fixed Effects vs. Random Effects
K
yit     xit  ui   it
y nt  an   bk xknt  wnt
k 1
ˆ
(1)
(2)
FE
RE
FE
RE
Dep. var.
GDP
GDP
GDP
GDP
DGCONS
-1.2286 (-9.01)
-1.2264 (-9.05)
-
-
DTEXP
-
-
-0.2657 (-5.56)
-0.2702 (-5.64)
DREV
-0.1832 (-2.68)
-0.1802 (-2.65)
-0.1547 (-2.01)
-0.1472 (-1.90)
DCAPF
0.7254 (11.47)
0.7257 (11.53)
0.7005 (9.85)
0.6989 (9.79)
0.55
0.54
0.49
0.46
0.0150
0.0149
0.0161
0.0162
R2
Hausman Test
•test statistics are -0.025 respectively 0.021.
2
•critical value at 5% level  3  7.814
Dependent Variable: GDP?
Method: Pooled Least Squares
Sample(adjusted): 1977 1997
Included observations: 21 after adjusting endpoints
Number of cross-sections used: 15
Total panel (balanced) observations: 315
Variable
Coefficient
Std. Error
t-Statistic
Prob.
D(CAPF?)
0.725486
0.063204
11.47842
0.0000
D(GCONS?)
-1.228627
0.136293
-9.014569
0.0000
D(REV?)
-0.183271
0.068199
-2.687308
0.0076
_AUT--C
0.022114
0.003285
6.731685
0.0000
_BEL--C
0.020368
0.003283
6.204628
0.0000
_DEN--C
0.017992
0.003285
5.477289
0.0000
_FIN--C
0.027167
0.003298
8.236291
0.0000
_FRA--C
0.021854
0.003293
6.635366
0.0000
_GER--C
0.018052
0.003280
5.503260
0.0000
_GRE--C
0.012265
0.003284
3.734947
0.0002
_IRE--C
0.040329
0.003293
12.24811
0.0000
_ITA--C
0.026152
0.003323
7.869903
0.0000
_LUX--C
0.036965
0.003280
11.26858
0.0000
_NED--C
0.014632
0.003284
4.455122
0.0000
_POR--C
0.033321
0.003303
10.08748
0.0000
_SPA--C
0.026909
0.003302
8.148580
0.0000
_SWE--C
0.015694
0.003286
4.775237
0.0000
_UK--C
0.019619
0.003292
5.960505
0.0000
R-squared
0.559056
Mean dependent var
0.021169
Adjusted R-squared
0.533816
S.D. dependent var
0.021994
S.E. of regression
0.015017
Sum squared resid
0.066979
Log likelihood
884.8459
F-statistic
22.15025
Durbin-Watson stat
1.587439
Prob(F-statistic)
0.000000
Dependent Variable: GDP?
Method: Pooled Least Squares
Sample(adjusted): 1977 1997
Included observations: 21 after adjusting endpoints
Number of cross-sections used: 15
Total panel (balanced) observations: 315
Variable
Coefficient
Std. Error
t-Statistic
Prob.
D(CAPF?)
0.700592
0.071070
9.857819
0.0000
D(TEXP?)
-0.265734
0.047714
-5.569341
0.0000
D(REV?)
-0.154769
0.076941
-2.011533
0.0452
_AUT--C
0.021731
0.003527
6.160615
0.0000
_BEL--C
0.020412
0.003526
5.789422
0.0000
_DEN--C
0.018164
0.003527
5.149435
0.0000
_FIN--C
0.025754
0.003537
7.280845
0.0000
_FRA--C
0.020542
0.003531
5.817209
0.0000
_GER--C
0.019291
0.003524
5.473797
0.0000
_GRE--C
0.011167
0.003523
3.169804
0.0017
_IRE--C
0.042033
0.003526
11.92139
0.0000
_ITA--C
0.026187
0.003568
7.338408
0.0000
_LUX--C
0.036666
0.003523
10.40782
0.0000
_NED--C
0.016592
0.003519
4.714858
0.0000
_POR--C
0.030810
0.003532
8.722262
0.0000
_SPA--C
0.025235
0.003537
7.133960
0.0000
_SWE--C
0.016546
0.003531
4.685862
0.0000
_UK--C
0.021612
0.003523
6.134115
0.0000
R-squared
0.491513
Mean dependent var
0.021169
Adjusted R-squared
0.462407
S.D. dependent var
0.021994
S.E. of regression
0.016126
Sum squared resid
0.077239
Log likelihood
862.3989
F-statistic
16.88738
Durbin-Watson stat
1.784239
Prob(F-statistic)
0.000000
OLS vs. GMM
K
y nt  ayn,t 1   bk xknt  f n  wnt
k 1
Ahn and Schmidt (1993) - GMM estimator
Balestra and Nerlove (1966) Z  D, X , X 1 
(1)
(2)
OLS
GMM
OLS
GMM
Dep. var.
GDP
GDP
GDP
GDP
GDP(-1)
0.2180 (4.95)
0.1889 (2.52)
0.1383 (2.88)
0.1504 (1.19)
-1.3301 (-10.01)
-1.3189 (-9.13)
-
-
DTEXP
-
-
-0.2597 (-5.50)
-0.2750 (-3.55)
DREV
-0.1976 (-3.00)
-0.1933 (-2.98)
-0.1741 (-2.28)
-0.1818 (-1.77)
DCAPF
0.5723 (8.38)
0.5848 (6.35)
0.6126 (8.00)
0.6020 (5.02)
0.59
0.59
0.50
0.50
0.0144
0.0144
0.0159
0.0159
DGCONS
R2
Hausman Test
•test statistics are 0.40 respectively 0.37
•critical value  2 4,0.1  7.78
Model (1)
.12
.08
.04
.06
.00
.04
-.04
.02
-.08
.00
-.02
-.04
-.06
50
100
Residual
150
200
Actual
250
Fitted
300
Model (2)
.12
.08
.04
.08
.00
.04
-.04
-.08
.00
-.04
-.08
50
100
Residual
150
200
Actual
250
Fitted
300
Fixed Effects with Cross Section Weights
ˆ
(1)
(2)
Dep. var.
GDP
GDP
GDP(-1)
0.1937 (4.61)
0.1227 (2.82)
-1.2013 (-9.90)
-
DTEXP
-
-0.3085 (-4.41)
DREV
-0.1901 (-3.37)
-0.1748 (-2.42)
DCAPF
0.6503 (7.93)
0.6910 (7.78)
0.60
0.53
0.0144
0.0158
DGCONS
R2
6.Conclusions
tax rates have a negative impact on economic growth
the level of tax rates is beyond the optimum point
the relation: government expenditures - economic growth is negative
and highly significant
government expenditures are situated above the point of
maximum economic growth
government consumption has a much greater negative impact
on output growth than total government expenditure
Shortcomings:
economic growth has many determinants
data with measurement errors
tax revenues as proxy for tax rates
government total expenditure separated on types
References
Barro, Robert (1990), “Government spending in a simple model of endogenous growth”,
Journal of Political Economy, 98(5), S103-117.
Barro, Robert (1990), “Economic Growth in a Cross Section of Countries”, The Quaterly
Journal of Economics, Volume 106, 407-443.
Barro, R. and Sala-i-Martin, X. (1992), “Public finance in models of economic growth”,
Review of Economic Studies, 59, 645-61.
Barro, R. and Sala-i-Martin, X. (1995), “Economic Growth”, The MIT Press Cambridge,
Massachusetts London, England, pp 153-161.
Blanchard, O. and Perotti R. (1998), “An Empirical Characterization of the Dynamic
Effects of Changes in Government Spending and Taxes on Output”, NBER, WP 7269
Corsetti, G. and Roubini, N. (1996), “Optimal Government Spending and Taxation in
Endogenous Growth Models”, NBER, WP 5851
Devereux, M. and Love, D. (1995), “The Dynamic Effects of Government Spending
Policies in a Two Sector Endogenous growth Model”, Journal of Money, Credit
and Banking, Volume 27, 232-256.
Fölster, Stefan, Henrekson, Magnus (2000), “Growth Effects of Government Expenditure
and Taxation in Rich Countries”, The European Economic Review.
Gale, W. and Easterly, W. (1995), “What Do Cross-Country Studies Teach about
Government Involvement, Prosperity and Economic growth? Comments and
Discussion”, Brookings Papers on Economic Activity, Volume 1995, 416-431.
Gerson, Philip (1998), “The Impact of Fiscal Policy Variables on Output Growth”, IMF WP/98/1.
Greene, William H. (2000), “Econometric Analysis”, Fourth Edition, Prentice Hall
International, Inc., New Jersey.
Gupta, S., Clements B., Baldacci E. and Mulas-Granados, C., “Expenditure Composition, Fiscal Adjustment,
and Growth in Low-Income Countries”, IMF WP/02/77.
Heitger, Bernhard (2001), “The Scope of Government and Its Impact on Economic
Growth in OECD Countries”, Kiel WP No. 1034.
Islam, Nazrul (1995), “Growth Empirics: A Panel Data Aproach”, The Quarterly Journal of Economics,
Volume 110, 1127-1170.
Jones, L., Manuelli, R. and Rossi P. (1993), “Optimal taxation in models of endogenous growth”,
Journal of Political Economy, 101(3), 485-519.
King, R., and Rebelo, S. (1990), “Public Policy and economic growth: Developing
neoclassical implications”, Journal of Political Economy, 98(5), S126-51.
Levine, Ross and Renelt, David (1992), “A Sensitivity Analysis of Cross-Country
Growth Regressions”, The American Economic Review, Volume 82, 942-963.
Perotti, Roberto (2002), “Estimating the Effects of Fiscal Policy in OECD
Countries”,
BCE WP no.168.
Ram, R. (1986), “Government size and economic growth: A new framework and some evidence from
cross-section and time series data”, The American Economic Review, 76(1), 191-203.
Sala-i-Martin, Xavier (1997), “I just run four million regressions”, NBER, WP 6252
Sevestre, Patrick (2002), “Econometrie des donnees de panel”, Dunod, Paris.
Stokey, N. and Rebelo, S. (1995), “Growth effects of flat-rate taxes”, Journal of Political Economy,
103(3), 510-50.
***The World Bank, World Development Indicators (2002)