FISCAL POLICY, INSTITUTIONS AND GROWTH: NEW INSIGHTS

Saima Nawaz and M. Idrees Khawaja ()
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M. Idrees Khawaja: Pakistan Institute of Development Economics (PIDE), Quaid-i-Azam University Campus, Islamabad, Pakistan

The Singapore Economic Review (SER), 2019, vol. 64, issue 05, 1251-1278

Abstract: The paper attempts to analyze the impact of fiscal policy on economic growth while considering level of development and controlling for state of institutions. We extend the Solow growth model by incorporating fiscal policy and institutions through using total factor productivity. Our empirical analysis includes a panel of 56 countries. The empirics demonstrate that impact of fiscal policy on growth is statistically insignificant in the full sample. However, splitting the sample into developed and developing economies, positive association with economic growth in developed economies and negative association in developing economies observed. Our findings thus inform that fiscal policy contributes positively to growth only in developed economies. The reason for this seems to be an enabling institutional environment in developed economies. This kind of enabling institutional environment allows fiscal policy to play positive role in developed economies and absence of such environment contributes to the negative impact of fiscal policy in developing economies.

Keywords: Fiscal policy; Institutions; Economic growth; Stages of development (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (10)

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DOI: 10.1142/S0217590816500296

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