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

39 Pages Posted: 15 Feb 2006

See all articles by Emanuele Baldacci

Emanuele Baldacci

International Monetary Fund (IMF) - Fiscal Affairs Department

Arye L. Hillman

Bar-Ilan University - Department of Economics; Centre for Economic Policy Research (CEPR)

Naoko C. Kojo

The World Bank

Date Written: December 2003

Abstract

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.

Keywords: Growth governance fiscal policy low-income countries

JEL Classification: E62 H62 O4

Suggested Citation

Baldacci, Emanuele and Hillman, Arye L. and Kojo, Naoko C., Growth, Governance, and Fiscal Policy Transmission Channels in Low-Income Countries (December 2003). IMF Working Paper No. 03/237, Available at SSRN: https://ssrn.com/abstract=880944

Emanuele Baldacci (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Arye L. Hillman

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel
+97 29 774 6424 (Phone)
+97 29 771 5628 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Naoko C. Kojo

The World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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