Fiscal Policy and Economic Growth Dynamics in Morocco from 1960 to 2022: A Nonlinear Modelling Approach

Atman Dkhissi

Journal of Tax Reform, 2024, vol. 10, issue 3, 556-571

Abstract: This study employs a nonlinear modelling approach to examine the relationship between fiscal policy and economic growth in Morocco from 1960 to 2022. Traditional linear models often assume a linear relationship between fiscal variables and economic growth, disregarding potential non-linearities. We use a Discrete Threshold Regression (TR) model, which describes a simple form of nonlinear regression featuring piecewise linear specifications and regime switching that occurs when an observed variable crosses unknown thresholds. Threshold modelling fixes these thresholds at 7.8% for the fiscal deficit and 70.9% for public debt. Below these thresholds, fiscal austerity in Morocco is recessionary (Keynesian regime). Above them, austerity becomes expansionary (classical regime). Our main policy implication is that when the debt-to-GDP ratio reaches 70.9% and /or the fiscal deficit hits 7.8%, rebuilding fiscal buffers should be a priority for the economy. Fiscal austerity will not only help restore sustainable debt levels but also stimulate economic growth. On the other hand, in countries where debt is under control, governments should not hesitate to implement fiscal stimulus measures. In the case of Morocco, it was found that when the public debt rate is below 70.9%, a 1 percentage point decrease in taxes is associated with a 0.1 percentage point increase in economic growth, although this result is not statistically significant. On the expenditure side, it was observed that a 1 percentage point increase in public spending is correlated with a 0.4 percentage point rise in economic growth. This study strengthens and complements existing literature that examines the relationship between fiscal policy and growth. Its scientific novelty lies in the use of a nonlinear approach.

Keywords: fiscal policy; economic growth; discrete threshold regression; nonlinear modelling approach; Morocco (search for similar items in EconPapers)
JEL-codes: E E6 E61 O1 O11 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:aiy:jnljtr:v:10:y:2024:i:3:p:556-571

DOI: 10.15826/jtr.2024.10.3.184

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