Fiscal Expenditure and Trading Implications for Economic Growth: The Case of Greece

Abstract

This paper investigates the effects of changes in fiscally-induced and trade-related variables on the rate of economic growth. Adopting the simplest possible version of the Keynesian/Ramsey paradigm, it is showed that both the level as proxy for the short-run impact, and the change as proxy for the steady-state effect of government expenditures can crucially influence the rate of economic growth. Concerning empirics, the method of unrestricted Vector Autoregressions (VARs) is applied without imposing any or the minimal possible, a priori assumption on the parameters of the estimating systems. In brief, it seems that fiscal policy behaves like a 'golden nexus' between output and business activity. In accordance with conventional priors, government expenditure and national income share a strong bidirectional causal relationship, suggesting that prudent courses of fiscal policy are required to attain but more critically sustain viable growth rates. Contrary to earlier studies, the trade impact on both national income and public spending appears less pronounced, pointing to the need towards an export-led growth policy, and/or a parallel increase in the production of importables to enhance competitiveness and thus overall current account improvement. Intuitively, such results are consistent with both the general-linear Barro-type models, in which the tax rate heavily matters and the political economy models where the size of the government affects economic growth. Last, but not the least, after experimenting with an alternative system consisting of inflation as an endogenous variable, some rather monetarist-unpleasant findings were noticed. On balance, there is an evidence confirming the economy’s best characterization by the Keynesian/Monetarist approach.

Keywords: Fiscal Policy, Trade, Growth, Granger Causality, Historical Decompositions, Impulse Response Functions

JEL Classification: C1, E6, F1, H5