ACADEMY OF ECONOMIC STUDIES

ACADEMY OF ECONOMIC STUDIES

DOCTORAL SCHOOL OF FINANACE AND BANKING

DISSERTATION PAPER

Student: RACARU IRINA

Supervisor:MOISĂ ATLĂR, Ph.D

BUCHAREST, JULY 2001

The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic Growth

FISCAL POLICY

ECONOMIC GROWTH

▪ taxation

▪ government spending


▪ neoclassic

▪ endogenous

CONDITIONAL CONVERGENCE


titititi

Tti Xyby

y

T ,,,,

, loglog1

1. THE EFFECTS OF TAXATION


2. THE EFFECTS OF GOVERNMENT SPENDING

Stokey and Rebelo (1995), Milesi-Ferretti and Roubini (1998), Cassou and Lansing (2001)

Krichel and Levine (1996)Bajo-Rubio, Diaz-Roldan and Monaverez-Garces (1999),Turnovski (1999)


t

ttttt K

KgHKLAKgKHLF 1)(),,,(

ttkt KYsdK zt

t eAA 0

0

00

lnln1

ln1

ln1

ln1

ln1lnln

yss

sznAt

e

t

yy

kgh

k

tt

0),,,( KgKHLFK0),,,( KgKHLFKK

α > γ α+β<1with and for

THE EMPIRICAL EVIDENCE


▪ cross section

▪ pool

Barro(1990) - negative effect of the government consumption

Easterly and Rebelo (1993) - pozitive effect of the public investment

The Effects of Fiscal Policy on Economic GrowthThe Effects of Fiscal Policy on Economic GrowthNo. Cod Country name No. Cod Country name No. Cod Country name

1 H AUS Australia 20 M SLV El Salvador 39 H NZL New Zealand

2 L BGD Bangladesh 21 L GMB Gambia, The 40 L NIC Nicaragua

3 M BLZ Belize 22 M GTM Guatemala 41 L PAK Pakistan

4 L BEN Benin 23 L GNB Guinea-Bissau 42 M PAN Panama

5 M BOL Bolivia 24 L IND India 43 M PNG Papua New Guinea

6 M BRA Brazil 25 L IDN Indonesia 44 M PRY Paraguay

7 M BGR Bulgaria 26 M IRN Iran, Islamic Rep. 45 M PER Peru

8 L KHM Cambodia 27 H JPN Japan 46 M PHL Philippines

9 H CAN Canada 28 L KEN Kenya 47 M POL Poland

10 M CPV Cape Verde 29 L KOR Korea, Rep. 48 M ROM Romania

11 L TCD Chad 30 L MDG Madagascar 49 M ZAF South Africa

12 M CHL Chile 31 L MWI Malawi 50 H SWE Sweden

13 L CHN China 32 M MYS Malaysia 51 M THA Thailand

14 M COL Colombia 33 L MRT Mauritania 52 M TUN Tunisia

15 M CRI Costa Rica 34 M MUS Mauritius 53 M TUR Turkey

16 L CIV Cote d'Ivoire 35 M MEX Mexico 54 H GBR United Kingdom

17 M DOM Dominican Republic 36 M MAR Morocco 55 H USA United States

18 M ECU Ecuador 37 M NAM Namibia 56 M URY Uruguay

19 M EGY Egypt, Arab Rep. 38 H NLD Netherlands 57 M VEN Venezuela, RB


Description

LOGGDPGRUSDthe real output growth (at market prices USD, constant 1995)

in logarithm for the period 1995–1996

LOGGDPUSD0the real output (at market prices USD, constant 1995) in

logarithm for 1995

LOGPBLINV the public investments share of GDP in logarithm for 1996

LOGPRVINV the private investments share of GDP in logarithm for 1996

LOGPOP population growth for the period 1995–1996

Source: World Bank Indicators

The variables:



The Augmented Dickey Fuller test

LOGGDPGRUSD LOGGDPUSD0 LOGPBLINV LOGPRVINV LOGPOP

lag 1 1 1 1 1t statistic -4,8705 -4,6769 -4,9948 -5,1560 -4,1221

1% -3,5523 -3,5523 -3,5523 -3,5523 -3,55235% -2,9146 -2,9146 -2,9146 -2,9146 -2,9146

LOGGDPGRUSD = 0.207 - 0.010*LOGGDPUSD0 + 0.005*LOGPBLINV +

(7,244) (-4,000) (1,067)

[7,822] [-3,572] [0,924]

0.026*LOGPRVINV - 2.112*LOGPOP - 0.149*DUMMYBGR + (4,401) (-5,470) (-7,157)

[3,933] [-4,394] [-9,572]

0.069*DUMMYMAR + 0.0625*DUMMYMWI

(4,015) (3,309)

[26,864] [7,825]

Ajusted R2=0,6925; F(7,49)=19,01796 [0,000]; σ=0.0169%; DW=1,92; RSS =0,014;

AR 1-5 F(5,44)=1,908 [0,112]; RESET F(1,56)=0,835 [0,365]; ARCH 4

F(4,41)=2,697 [0,042]; Jarque-Bera X2(2)=0,279 [0,870]


-0.06

-0.04

-0.02

0.00

0.02

0.04

5 10 15 20 25 30 35 40 45 50 55


-0.04

-0.02

0.00

0.02

0.04

38 40 42 44 46 48 50 52 54 56

Recursive Residuals ± 2 S.E.

-15

-10

-5

0

5

10

15

38 40 42 44 46 48 50 52 54 56

CUSUM 5% Significance

-0.4

0.0

0.4

0.8

1.2

1.6

38 40 42 44 46 48 50 52 54 56

CUSUM of Squares 5% Significance


LOGGDPGRUSD = 0.207 - 0.010*LOGGDPUSD0 + 0.005*LOGPBLINV +

(7,244) (-4,000) (1,067)

[7,822] [-3,572] [0,924]

0.026*LOGPRVINV - 2.112*LOGPOP

(4,401) (-5,470)

[3,933] [-4,394]

Ajusted R2=0,487; F(4,46)=13,58425 [0,000]; σ=0.0169%; DW=1,95;

RSS =0,014; AR 1-5 F(5,41)=0,964 [0,450]; RESET F(1,53)=0,835 [0,365];

ARCH 4 F(4,38)=1,841 [0,042]; Jarque-Bera X2(2)=0,362 [0,8345]



-0.06

-0.04

-0.02

0.00

0.02

0.04

5 10 15 20 25 30 35 40 45 50

-0.06

-0.04

-0.02

0.00

0.02

0.04

0.06

10 15 20 25 30 35 40 45 50


-30

-20

-10

0

10

20

30

10 15 20 25 30 35 40 45 50

CUSUM 5% Significance

-0.4

0.0

0.4

0.8

1.2

1.6

10 15 20 25 30 35 40 45 50

CUSUM of Squares 5% Significance

0.15

0.10

0.05

0.00-0.06

-0.04

-0.02

0.00

0.02

0.04

0.06

10 15 20 25 30 35 40 45 50

One-Step Probability Recursive Residuals

0.15

0.10

0.05

0.00-0.06

-0.04

-0.02

0.00

0.02

0.04

0.06

10 15 20 25 30 35 40 45 50

N-Step Probability Recursive Residuals


-0.15

-0.10

-0.05

0.00

0.05

0.10

-4 -3 -2 -1 0

LOGCONS

LO

GG

DP

GR

US

D

-0.15

-0.10

-0.05

0.00

0.05

0.10

-5 -4 -3 -2 -1 0

LOGPBLINVL

OG

GD

PG

RU

SD

MIDDLE

-0.02

0.00

0.02

0.04

0.06

0.08

0.10

-4 -3 -2 -1 0LOGPBLINV

LO

GG

DP

GR

US

D

LOW

-0.02

0.00

0.02

0.04

0.06

0.08

0.10

-4 -3 -2 -1 0

LOGCONS

LO

GG

DP

GR

US

D


0.00

0.01

0.02

0.03

0.04

0.05

-2.5 -2.0 -1.5 -1.0 -0.5 0.0

LOGCONS

LOG

GD

PG

RU

SD

0.00

0.01

0.02

0.03

0.04

0.05

-4 -3 -2 -1 0

LOGPBLINV

LOG

GD

PG

RU

SD

HIGH

THE EFFECTS OF GOVERNMENT SPENDING ON INDUSTRIAL PRODUCTION - The Romanian Case


The variables:Description

PROD industrial production in logarithm

INV government spending in industrial activities, infrastructure, research, education, health,

national defense in logarithm

INVEST government spending in economic activities, infrastructure, research, education, health and

national defense in logarithm

CONS the public consumption determined as difference of government spending – public

investment, INVEST

Source: National Bank of Romania

4.5

4.6

4.7

4.8

4.9

5.0

5.1

91 92 93 94 95 96 97 98 99 00 01

LP ROD

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

91 92 93 94 95 96 97 98 99 00 01

INV E S T2

1.5

2.0

2.5

3.0

3.5

4.0

91 92 93 94 95 96 97 98 99 00 01

INV E S T4

2.0

2.5

3.0

3.5

4.0

91 92 93 94 95 96 97 98 99 00 01

CONS 4


PROD INV INVEST CONSlag 4 4 4 4t statistic -2,4322 -2,4343 -2,3433 -1,9623

1% -3,4890 -3,4890 -3,4890 -3,48905% -2,8870 -2,8870 -2,8870 -2,8870

ΔPROD ΔINV ΔINVEST ΔCONSlag 4 4 4 4t statistic -5,8377 -9,8231 -8,8085 -7,0841

1% -3,4895 -3,4895 -3,4895 -3,48955% -2,8872 -2,8872 -2,8872 -2,8872


The Augmented Dickey Fuller test

Eigenvalue 0,1505 0,0025H0 r = 0 r =<1LR trace 13,75 0,21

95% 12,53 16,3199% 3,84 6,51

PROD INV1,000 -2,211

σ 0,076t statistic -29,06

The Johansen cointagration test


For the PROD-INV relation:


PRODt = 2,211·INVt + ut

(29,06)

ΔPRODt = -0,132·ΔPRODt-1 - 0,083·ΔPRODt-2 -0,049·ΔINVt-1

(-1,769) (1,074) (-2,530)

- 0,080·ΔINVt-2 -0,122·SEAS(12) - 0,004·ut-1 + εt

(-5,065) (-6,690) (-0,481)

ΔINVt = 1,302·ΔPRODt-1 + 0,212·ΔPRODt-2 -0,404·ΔINVt-1

(3,705) (0,581) (-4,375)

- 0,667·ΔINVt-2 +0,483·SEAS(12) +0,154·ut-1 + εt

(-3,573) (5,592) (3,665)


-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

91 92 93 94 95 96 97 98 99 00

PROD Residuals

-1.5

-1.0

-0.5

0.0

0.5

1.0

91 92 93 94 95 96 97 98 99 00

INV Residuals

R-squared 0.424573 Adj. R-squared 0.398178 Sum sq. resids 0.307362 S.E. equation 0.053102 F-statistic 16.08493 Log likelihood 177.4901 Akaike AIC -2.98244 Schwarz SC -2.83922 Mean dependent -0.00209 S.D. dependent 0.068451

R-squared 0.567138 Adj. R-squared 0.547282 Sum sq. resids 6.853019 S.E. equation 0.250742 F-statistic 28.5625 Log likelihood -1.01396 Akaike AIC 0.121982 Schwarz SC 0.265196 Mean dependent -0.00533 S.D. dependent 0.372661


Determinant Residual Covariance 0.000159 Log Likelihood 176.581 Akaike Information Criteria -2.8275 Schwarz Criteria -2.49333


-0.020

-0.015

-0.010

-0.005

0.000

0.005

0.010

5 10 15 20 25 30 35 40 45 50 55 60

Response of PROD to One S.D. INV Innovation

For 5 years

Eigenvalue 0,239 0,025 0,013H0 r = 0 r =< 1 r =< 2LR trace 35,834 4,3769 1,508

95% 24,31 12,53 3,8499% 29,75 16,31 6,51

PROD INVEST CONS1,000 -1,0411 -0,6682

σ 0,0891 0,0811t statistic -11,6906 -8,2244


For the PROD - INVEST, CONS relation:

The Johansen cointagration test


PRODt = 1,041·INVESTt +0,668·CONSt+ ut

(11,69) (8,244)

ΔPRODt = -0,092·ΔPRODt-1 -0,033·ΔPRODt-2 -0,054·ΔINVESTt-1

(-1,185) (-0,432) (-2,473)

- 0,079·ΔINVESTt-2 -0,056·CONSt-1 -0,039·CONSt-2

(-4,394) (-2,305) (-1,726)

-0,122·SEAS(12) - 0,033·ut-1 + εt

(-6,874) (-1,655)


ΔINVESTt = 0,836·ΔPRODt-1+0,237·ΔPRODt-2 -0,264·ΔINVESTt-1

(2,344) (0,668) (-2,637)

- 0,185·ΔINVESTt-2 -0,011·CONSt-1 +0,053·CONSt-2

(-2,240) (-0,103) (0,501)

+0,439·SEAS(12) + 0,435·ut-1 + εt

(5,409) (4,816)ΔCONSt = 0,601·ΔPRODt-1 +0,379·ΔPRODt-2 +0,149·ΔINVESTt-1

(2,290) (1,450) (2,026)

+0,142·ΔINVESTt-2 -0,642·CONSt-1 -0,517·CONSt-2

(2,340) (-7,806) (-6,689)

+0,380·SEAS(12) +0,214·ut-1 + εt

(6,374) (3,219)


-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

91 92 93 94 95 96 97 98 99 00 01

PROD Residuals

R-squared 0.468355 Adj. R-squared 0.433574 Sum sq. resids 0.283976 S.E. equation 0.051517 F-statistic 13.46601 Log likelihood 182.0404 Akaike AIC -3.02679 Schwarz SC -2.83584 Mean dependent -0.00209 S.D. dependent 0.068451

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

91 92 93 94 95 96 97 98 99 00 01

INVEST Residuals

R-squared 0.594033 Adj. R-squared 0.567474 Sum sq. resids 5.940136 S.E. equation 0.235617 F-statistic 22.36688 Log likelihood 7.206074 Akaike AIC 0.013807 Schwarz SC 0.204759 Mean dependent -0.00618 S.D. dependent 0.358262


-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

91 92 93 94 95 96 97 98 99 00 01

CONS ResidualsR-squared 0.658081 Adj. R-squared 0.635712 Sum sq. resids 3.212465 S.E. equation 0.173272 F-statistic 29.41989 Log likelihood 42.55094 Akaike AIC -0.60089 Schwarz SC -0.40993 Mean dependent 0.007055 S.D. dependent 0.287081

Determinant Residual Covariance 3.33E-06 Log Likelihood 235.6661 Akaike Information Criteria -3.62898 Schwarz Criteria -2.98451

Response to One S.D. Innovations


-0.006

-0.004

-0.002

0.000

0.002

0.004

0.006

5 10 15 20 25 30 35 40 45 50 55 60

Response of PROD to CONS

-0.015

-0.010

-0.005

0.000

0.005

0.010

0.015

5 10 15 20 25 30 35 40 45 50 55 60

Response of PROD to INVEST

For 5 years

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