Growth, governance, and fiscal policy transmission channels in low-income countries

Emanuele Baldacci, Arye L. Hillman, Naoko C. Kojo

Research output: Contribution to journalArticlepeer-review

60 Scopus citations

Abstract

Private investment is the principal transmission channel through which fiscal policy affects growth in high-income countries. In low-income countries, governance and also other considerations suggest that the primary channel is factor productivity. Empirical results reported in this paper confirm this expectation: in low-income countries factor productivity is some four times more effective than investment as a channel for increasing growth through fiscal policy. Although the private investment response to fiscal contraction may be minor, high-deficit low-income countries can nonetheless benefit by reducing unsustainable fiscal deficits because of governance-related factor productivity responses that increase growth.

Original languageEnglish
Pages (from-to)517-549
Number of pages33
JournalEuropean Journal of Political Economy
Volume20
Issue number3
DOIs
StatePublished - Sep 2004

Keywords

  • Fiscal policy
  • Governance
  • Growth
  • Low-income countries

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