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

Naoko Kojo, Arye Hillman () and Emanuele Baldacci

No 2003/237, IMF Working Papers from International Monetary Fund

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: WP; deficit; exchange rate; low-deficit dummy (search for similar items in EconPapers)
Pages: 39
Date: 2003-12-01
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Citations: View citations in EconPapers (9)

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Journal Article: Growth, governance, and fiscal policy transmission channels in low-income countries (2004)
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