Fiscal Policies and Economic Growth in Europe: An Empirical Analysis
26 Pages Posted: 28 Jun 2012
Date Written: March 21, 2002
The methodological issues and econometric problems in the empirical assessment of the determinants of growth are systematically reviewed in the first part of the paper by Hiebert, Lamo, de Ávila and Vidal. In the second part, the authors assess empirically the long-run effects of fiscal policy on growth in the EU countries. As in the previous paper, the authors rely on panel data. They make use of a generalized method of moments estimator to control for the endogeneity of explanatory variables and correlated individual effects. In order to control for the cycle, trend growth is used as dependent variable in the estimation, innovating with respect to the standard practice of taking 5-years averages. The results tend to support the hypothesis that a negative relationship between the level of government revenue and trend growth exists for EU countries. Moreover, they show that improvements in the budget balance tend to enhance long-term growth. Finally, the results suggest that changes in government expenditure, controlling for their financing, have a limited impact on the trend growth rate.
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