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The Effects of Fiscal Policy on Economic Growth. ACADEMY OF ECONOMIC STUDIES. DOCTORAL SCHOOL OF FINANACE AND BANKING. DISSERTATION PAPER. Student: RACARU IRINA Supervisor:MOISĂ ATLĂR, Ph.D. BUCHAREST, JULY 2001. The Effects of Fiscal Policy on Economic Growth. FISCAL POLICY. taxation - PowerPoint PPT PresentationTRANSCRIPT
ACADEMY OF ECONOMIC STUDIES
DOCTORAL SCHOOL OF FINANACE AND BANKING
DISSERTATION PAPER
Student: RACARU IRINA
Supervisor:MOISĂ ATLĂR, Ph.D
BUCHAREST, JULY 2001
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
FISCAL POLICY
ECONOMIC GROWTH
▪ taxation
▪ government spending
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
▪ neoclassic
▪ endogenous
CONDITIONAL CONVERGENCE
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
titititi
Tti Xyby
yT ,,,
,
, loglog1
1. THE EFFECTS OF TAXATION
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
2. THE EFFECTS OF GOVERNMENT SPENDING
Stokey and Rebelo (1995), Milesi-Ferretti and Roubini (1998), Cassou and Lansing (2001)
Krichel and Levine (1996)Bajo-Rubio, Diaz-Roldan and Monaverez-Garces (1999),Turnovski (1999)
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
t
ttttt K
KgHKLAKgKHLF 1)(),,,(
ttkt KYsdK zt
t eAA 0
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00
lnln1
ln1
ln1
ln1
ln1lnln
yss
sznAte
tyy
kgh
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tt
0),,,( KgKHLFK0),,,( KgKHLFKK
α > γ α+β<1with and for
THE EMPIRICAL EVIDENCE
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
▪ cross section
▪ pool
Barro(1990) - negative effect of the government consumption
Easterly and Rebelo (1993) - pozitive effect of the public investment
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic GrowthNo. Cod Country name No. Cod Country name No. Cod Country name
1 H AUS Australia 20 M SLV El Salvador 39 H NZL New Zealand
2 L BGD Bangladesh 21 L GMB Gambia, The 40 L NIC Nicaragua
3 M BLZ Belize 22 M GTM Guatemala 41 L PAK Pakistan
4 L BEN Benin 23 L GNB Guinea-Bissau 42 M PAN Panama
5 M BOL Bolivia 24 L IND India 43 M PNG Papua New Guinea
6 M BRA Brazil 25 L IDN Indonesia 44 M PRY Paraguay
7 M BGR Bulgaria 26 M IRN Iran, Islamic Rep. 45 M PER Peru
8 L KHM Cambodia 27 H JPN Japan 46 M PHL Philippines
9 H CAN Canada 28 L KEN Kenya 47 M POL Poland
10 M CPV Cape Verde 29 L KOR Korea, Rep. 48 M ROM Romania
11 L TCD Chad 30 L MDG Madagascar 49 M ZAF South Africa
12 M CHL Chile 31 L MWI Malawi 50 H SWE Sweden
13 L CHN China 32 M MYS Malaysia 51 M THA Thailand
14 M COL Colombia 33 L MRT Mauritania 52 M TUN Tunisia
15 M CRI Costa Rica 34 M MUS Mauritius 53 M TUR Turkey
16 L CIV Cote d'Ivoire 35 M MEX Mexico 54 H GBR United Kingdom
17 M DOM Dominican Republic 36 M MAR Morocco 55 H USA United States
18 M ECU Ecuador 37 M NAM Namibia 56 M URY Uruguay
19 M EGY Egypt, Arab Rep. 38 H NLD Netherlands 57 M VEN Venezuela, RB
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
Description
LOGGDPGRUSDthe real output growth (at market prices USD, constant 1995)
in logarithm for the period 1995–1996
LOGGDPUSD0the real output (at market prices USD, constant 1995) in
logarithm for 1995
LOGPBLINV the public investments share of GDP in logarithm for 1996
LOGPRVINV the private investments share of GDP in logarithm for 1996
LOGPOP population growth for the period 1995–1996
Source: World Bank Indicators
The variables:
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
The Augmented Dickey Fuller test
LOGGDPGRUSD LOGGDPUSD0 LOGPBLINV LOGPRVINV LOGPOP
lag 1 1 1 1 1t statistic -4,8705 -4,6769 -4,9948 -5,1560 -4,1221
1% -3,5523 -3,5523 -3,5523 -3,5523 -3,55235% -2,9146 -2,9146 -2,9146 -2,9146 -2,9146
LOGGDPGRUSD = 0.207 - 0.010*LOGGDPUSD0 + 0.005*LOGPBLINV + (7,244) (-4,000) (1,067)
[7,822] [-3,572] [0,924] 0.026*LOGPRVINV - 2.112*LOGPOP - 0.149*DUMMYBGR + (4,401) (-5,470) (-7,157)
[3,933] [-4,394] [-9,572] 0.069*DUMMYMAR + 0.0625*DUMMYMWI (4,015) (3,309)
[26,864] [7,825]
Ajusted R2=0,6925; F(7,49)=19,01796 [0,000]; σ=0.0169%; DW=1,92; RSS =0,014;
AR 1-5 F(5,44)=1,908 [0,112]; RESET F(1,56)=0,835 [0,365]; ARCH 4
F(4,41)=2,697 [0,042]; Jarque-Bera X2(2)=0,279 [0,870]
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
-0.06
-0.04
-0.02
0.00
0.02
0.04
5 10 15 20 25 30 35 40 45 50 55
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
-0.04
-0.02
0.00
0.02
0.04
38 40 42 44 46 48 50 52 54 56
Recursive Residuals ± 2 S.E.
-15
-10
-5
0
5
10
15
38 40 42 44 46 48 50 52 54 56
CUSUM 5% Significance
-0.4
0.0
0.4
0.8
1.2
1.6
38 40 42 44 46 48 50 52 54 56
CUSUM of Squares 5% Significance
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
LOGGDPGRUSD = 0.207 - 0.010*LOGGDPUSD0 + 0.005*LOGPBLINV + (7,244) (-4,000) (1,067)
[7,822] [-3,572] [0,924]
0.026*LOGPRVINV - 2.112*LOGPOP (4,401) (-5,470)
[3,933] [-4,394]
Ajusted R2=0,487; F(4,46)=13,58425 [0,000]; σ=0.0169%; DW=1,95;
RSS =0,014; AR 1-5 F(5,41)=0,964 [0,450]; RESET F(1,53)=0,835 [0,365];
ARCH 4 F(4,38)=1,841 [0,042]; Jarque-Bera X2(2)=0,362 [0,8345]
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
-0.06
-0.04
-0.02
0.00
0.02
0.04
5 10 15 20 25 30 35 40 45 50
-0.06
-0.04
-0.02
0.00
0.02
0.04
0.06
10 15 20 25 30 35 40 45 50
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
-30
-20
-10
0
10
20
30
10 15 20 25 30 35 40 45 50
CUSUM 5% Significance
-0.4
0.0
0.4
0.8
1.2
1.6
10 15 20 25 30 35 40 45 50
CUSUM of Squares 5% Significance
0.15
0.10
0.05
0.00-0.06-0.04-0.020.000.020.040.06
10 15 20 25 30 35 40 45 50
One-Step Probability Recursive Residuals
0.15
0.10
0.05
0.00-0.06-0.04-0.020.000.020.040.06
10 15 20 25 30 35 40 45 50
N-Step Probability Recursive Residuals
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
-0.15
-0.10
-0.05
0.00
0.05
0.10
-4 -3 -2 -1 0
LOGCONS
LOG
GD
PG
RU
SD
-0.15
-0.10
-0.05
0.00
0.05
0.10
-5 -4 -3 -2 -1 0LOGPBLINV
LOG
GD
PG
RU
SD
MIDDLE
-0.02
0.00
0.02
0.04
0.06
0.08
0.10
-4 -3 -2 -1 0LOGPBLINV
LOG
GD
PG
RU
SD
LOW
-0.02
0.00
0.02
0.04
0.06
0.08
0.10
-4 -3 -2 -1 0
LOGCONS
LOG
GD
PG
RU
SD
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
0.00
0.01
0.02
0.03
0.04
0.05
-2.5 -2.0 -1.5 -1.0 -0.5 0.0
LOGCONS
LOG
GD
PG
RU
SD
0.00
0.01
0.02
0.03
0.04
0.05
-4 -3 -2 -1 0
LOGPBLINV
LOG
GD
PG
RU
SD
HIGH
THE EFFECTS OF GOVERNMENT SPENDING ON INDUSTRIAL PRODUCTION - The Romanian Case
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
The variables:Description
PROD industrial production in logarithm
INV government spending in industrial activities, infrastructure, research, education, health,
national defense in logarithm
INVEST government spending in economic activities, infrastructure, research, education, health and
national defense in logarithm
CONS the public consumption determined as difference of government spending – public
investment, INVEST
Source: National Bank of Romania
4.5
4.6
4.7
4.8
4.9
5.0
5.1
91 92 93 94 95 96 97 98 99 00 01
LP ROD
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
91 92 93 94 95 96 97 98 99 00 01
INV E S T2
1.5
2.0
2.5
3.0
3.5
4.0
91 92 93 94 95 96 97 98 99 00 01
INV E S T4
2.0
2.5
3.0
3.5
4.0
91 92 93 94 95 96 97 98 99 00 01
CONS 4
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
PROD INV INVEST CONSlag 4 4 4 4t statistic -2,4322 -2,4343 -2,3433 -1,9623
1% -3,4890 -3,4890 -3,4890 -3,48905% -2,8870 -2,8870 -2,8870 -2,8870
ΔPROD ΔINV ΔINVEST ΔCONSlag 4 4 4 4t statistic -5,8377 -9,8231 -8,8085 -7,0841
1% -3,4895 -3,4895 -3,4895 -3,48955% -2,8872 -2,8872 -2,8872 -2,8872
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
The Augmented Dickey Fuller test
Eigenvalue 0,1505 0,0025H0 r = 0 r =<1LR trace 13,75 0,21
95% 12,53 16,3199% 3,84 6,51
PROD INV1,000 -2,211
σ 0,076t statistic -29,06
The Johansen cointagration test
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
For the PROD-INV relation:
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic GrowthPRODt = 2,211·INVt + ut
(29,06)
ΔPRODt = -0,132·ΔPRODt-1 - 0,083·ΔPRODt-2 -0,049·ΔINVt-1
(-1,769) (1,074) (-2,530)
- 0,080·ΔINVt-2 -0,122·SEAS(12) - 0,004·ut-1 + εt
(-5,065) (-6,690) (-0,481)ΔINVt = 1,302·ΔPRODt-1 + 0,212·ΔPRODt-2 -0,404·ΔINVt-1
(3,705) (0,581) (-4,375)
- 0,667·ΔINVt-2 +0,483·SEAS(12) +0,154·ut-1 + εt
(-3,573) (5,592) (3,665)
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
91 92 93 94 95 96 97 98 99 00
PROD Residuals
-1.5
-1.0
-0.5
0.0
0.5
1.0
91 92 93 94 95 96 97 98 99 00
INV Residuals
R-squared 0.424573 Adj. R-squared 0.398178 Sum sq. resids 0.307362 S.E. equation 0.053102 F-statistic 16.08493 Log likelihood 177.4901 Akaike AIC -2.98244 Schwarz SC -2.83922 Mean dependent -0.00209 S.D. dependent 0.068451
R-squared 0.567138 Adj. R-squared 0.547282 Sum sq. resids 6.853019 S.E. equation 0.250742 F-statistic 28.5625 Log likelihood -1.01396 Akaike AIC 0.121982 Schwarz SC 0.265196 Mean dependent -0.00533 S.D. dependent 0.372661
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
Determinant Residual Covariance 0.000159 Log Likelihood 176.581 Akaike Information Criteria -2.8275 Schwarz Criteria -2.49333
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
-0.020
-0.015
-0.010
-0.005
0.000
0.005
0.010
5 10 15 20 25 30 35 40 45 50 55 60
Response of PROD to One S.D. INV Innovation
For 5 years
Eigenvalue 0,239 0,025 0,013H0 r = 0 r =< 1 r =< 2LR trace 35,834 4,3769 1,508
95% 24,31 12,53 3,8499% 29,75 16,31 6,51
PROD INVEST CONS1,000 -1,0411 -0,6682
σ 0,0891 0,0811t statistic -11,6906 -8,2244
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
For the PROD - INVEST, CONS relation:
The Johansen cointagration test
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
PRODt = 1,041·INVESTt +0,668·CONSt+ ut
(11,69) (8,244)
ΔPRODt = -0,092·ΔPRODt-1 -0,033·ΔPRODt-2 -0,054·ΔINVESTt-1
(-1,185) (-0,432) (-2,473)
- 0,079·ΔINVESTt-2 -0,056·CONSt-1 -0,039·CONSt-2
(-4,394) (-2,305) (-1,726)
-0,122·SEAS(12) - 0,033·ut-1 + εt
(-6,874) (-1,655)
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
ΔINVESTt = 0,836·ΔPRODt-1+0,237·ΔPRODt-2 -0,264·ΔINVESTt-1
(2,344) (0,668) (-2,637)
- 0,185·ΔINVESTt-2 -0,011·CONSt-1 +0,053·CONSt-2
(-2,240) (-0,103) (0,501)
+0,439·SEAS(12) + 0,435·ut-1 + εt
(5,409) (4,816)ΔCONSt = 0,601·ΔPRODt-1 +0,379·ΔPRODt-2 +0,149·ΔINVESTt-1
(2,290) (1,450) (2,026)
+0,142·ΔINVESTt-2 -0,642·CONSt-1 -0,517·CONSt-2
(2,340) (-7,806) (-6,689)
+0,380·SEAS(12) +0,214·ut-1 + εt
(6,374) (3,219)
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
91 92 93 94 95 96 97 98 99 00 01
PROD Residuals
R-squared 0.468355 Adj. R-squared 0.433574 Sum sq. resids 0.283976 S.E. equation 0.051517 F-statistic 13.46601 Log likelihood 182.0404 Akaike AIC -3.02679 Schwarz SC -2.83584 Mean dependent -0.00209 S.D. dependent 0.068451
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
91 92 93 94 95 96 97 98 99 00 01
INVEST Residuals
R-squared 0.594033 Adj. R-squared 0.567474 Sum sq. resids 5.940136 S.E. equation 0.235617 F-statistic 22.36688 Log likelihood 7.206074 Akaike AIC 0.013807 Schwarz SC 0.204759 Mean dependent -0.00618 S.D. dependent 0.358262
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
91 92 93 94 95 96 97 98 99 00 01
CONS ResidualsR-squared 0.658081 Adj. R-squared 0.635712 Sum sq. resids 3.212465 S.E. equation 0.173272 F-statistic 29.41989 Log likelihood 42.55094 Akaike AIC -0.60089 Schwarz SC -0.40993 Mean dependent 0.007055 S.D. dependent 0.287081
Determinant Residual Covariance 3.33E-06 Log Likelihood 235.6661 Akaike Information Criteria -3.62898 Schwarz Criteria -2.98451
Response to One S.D. Innovations
The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth
-0.006
-0.004
-0.002
0.000
0.002
0.004
0.006
5 10 15 20 25 30 35 40 45 50 55 60
Response of PROD to CONS
-0.015
-0.010
-0.005
0.000
0.005
0.010
0.015
5 10 15 20 25 30 35 40 45 50 55 60
Response of PROD to INVEST
For 5 years