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Growth, Deficits and Uncertainty: Theoretical Aspects and Empirical Evidence

Eleftherios Goulas () and Athina Zervoyianni ()

Working Paper series from Rimini Centre for Economic Analysis

Abstract: We examine the relationship between fiscal deficits and per-capita income growth in a panel of 27 European countries, allowing for perceived risks, in terms of fiscal sustainability, associated with additional government spending. Such risks are proxied by the conditional variability of manufacturing production and stock market returns and by the unconditional variability of two survey-based economic sentiment indicators. To help clarifying how fiscal variables impact on growth and to provide a point of reference for the interpretation of the empirical results a structural growth model is first identified. We find evidence of an asymmetric relationship, in that fiscal deficits give rise to adverse growth effects if they coincide with high uncertainty regarding the prospects of the economy and no significant negative growth effects in the low-uncertainty case.

Keywords: growth; fiscal policy; government budget constraint; uncertainty (search for similar items in EconPapers)
JEL-codes: O40 E60 H60 D80 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-pbe
Date: 2013-06
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