Revisiting the Growth Effects of Fiscal Policy: A Bayesian Model Averaging Approach

32 Pages Posted: 7 Nov 2017

See all articles by K. Peren Arin

K. Peren Arin

Zayed University

Elias Braunfels

Oslo Economics

Gernot Doppelhofer

Norwegian School of Economics (NHH) - Department of Economics

Date Written: October 8, 2017

Abstract

Motivated by the mixed evidence in previous literature, we reexamine the effects of various types of government spending and taxes, as well as overall budget surplus/deficit, on economic growth. To address the model uncertainty issue that may have plagued earlier studies we employ a Bayesian Model Averaging (BMA) approach. We use a panel data set for OECD countries for the 1990-2013 period, control for country and time specific effects, and allow for a wide range of other potential growth determinants. The results suggest a robust link between only some fiscal variables and economic growth. On the spending side, productive public spending has a robust positive effect on growth. On the revenue side, we document a robust negative effect for the top corporate tax rate, but, maybe surprisingly, not for any income tax variable. Finally, our results suggest that a budget surplus has a robust positive effect on economic performance. We also analyze the timing of effects and conclude that most effects occur with a lag of two years.

Keywords: Fiscal Policy, Public Spending, Taxes, Economic Growth

JEL Classification: E62, H20, O40

Suggested Citation

Arin, Kerim Peren and Braunfels, Elias and Doppelhofer, Gernot, Revisiting the Growth Effects of Fiscal Policy: A Bayesian Model Averaging Approach (October 8, 2017). CAMA Working Paper No. 68/2017, Available at SSRN: https://ssrn.com/abstract=3065703 or http://dx.doi.org/10.2139/ssrn.3065703

Kerim Peren Arin (Contact Author)

Zayed University ( email )

P.O. Box 4783
Abu Dhabi
United Arab Emirates

Elias Braunfels

Oslo Economics ( email )

Kronprinsesse Märthas plass 1
Oslo, 0160
Norway

Gernot Doppelhofer

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

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