Fiscal Policy And Economic Growth: The Effect of Fiscal Volatility

Abstract

This paper investigates the effect of fiscal policy on economic growth. Unlike the literature on growth that emphasizes the level and the nature of fiscal parameters, this paper focuses on the effect of fiscal volatility on economic growth. The literature on growth ignores the micro-economic instability associated with frequent changes of fiscal policy. The empirical results of this paper indicate that the effect of fiscal policy on economic growth is inconclusive. Most of the fiscal policy parameters commonly used in the growth literature had failed to explain growth differences across countries. However, when fiscal policy instability variables are used in the growth equation, almost all of the variables are significantly and negatively correlated with economic growth.