Choosing the Optimal Tool for Fiscal Adjustment or Living under Fiscal Constraints: Panel Evidence from Selected OECD Countries

Cagri Esener (), Brigitte Granville and Roman Matousek ()
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Cagri Esener: Bandirma Onyedi Eylul University, Faculty of Economics and Administrative Sciences, Bandirma-Balikesir, Turkey
Roman Matousek: Queen Mary University of London, School of Business and Management, London, UK

Economic Research Guardian, 2022, vol. 12, issue 1, 2-29

Abstract: This article examines the long-run two-way causal relationship between government revenues and spending and their interaction with the yearly change in public debt for eighteen OECD countries by using annual data for 1976-2017 period. The empirical literature has mainly focused on the long run relationship between government expenditure and revenues or other single country time series while only a few studies have used panel causality analysis and none have investigated the link with the evolution of public debt ratios. The purpose of this paper is to present a dynamic model identifying the underlying relationships constituting the fiscal policy set-up in sample countries. We apply a robust dynamic panel causality methodology based on SUR systems and Wald tests with country specific bootstrap critical values. The study also aims to provide the basis for recommendations on the policy response to public finance challenges stemming from exogenous shocks like the global pandemic that began in 2020. By developing an enhanced analysis of the long-term causal relationship between taxation, spending and their interaction with changes in public debt, the study not only provides fresh insights into the sustainability and optimal design of fiscal adjustment efforts but also offers a country-specific schematization as a guide for policymaking.

Keywords: Fiscal Policy; Government Revenue and Taxation; Government Expenditure; Public Debt; Bootstrap Panel Granger Causality (search for similar items in EconPapers)
JEL-codes: E60 E62 H20 H50 H60 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:wei:journl:v:12:y:2022:i:1:p:2-29

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