Public Finances and Long-Term Growth in Europe - Evidence from a Panel Data Analysis

51 Pages Posted: 2 Dec 2003

Date Written: July 2003

Abstract

In Lisbon the European Council proclaimed a European growth strategy. It considers an average economic "growth rate of around 3 percent as a realistic prospect for the coming years" and assigns public finances an important role in the process of achieving this goal. This paper addresses the question whether we can find empirical evidence for European countries that public finance reform affects trend growth. Focusing on time series patterns, we investigate whether there have been persistent shifts or trends in economic growth and fiscal variables over the last 40 years. In addition, we estimate a distributed lag model, which 1) indicates that government consumption and transfers negatively affect growth rates of GDP per capita over the business cycle, while public investment has a positive impact, and 2) provides robust evidence that distortionary taxation affects growth in the medium-term through its impact on the accumulation of private physical capital.

Keywords: Panel Cointegration; Public Finances; Economic Growth

JEL Classification: C22, C23, H11, O11

Suggested Citation

Romero de Avila Torrijos, Diego and Strauch, Rolf, Public Finances and Long-Term Growth in Europe - Evidence from a Panel Data Analysis (July 2003). ECB Working Paper No. 246. Available at SSRN: https://ssrn.com/abstract=457318

Diego Romero de Avila Torrijos (Contact Author)

University of Exeter ( email )

Exeter EX4 4QX, Devon
United Kingdom

Rolf Strauch

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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