Fiscal Deficit and Its Effects on Economic Growth: Empirical Evidence

• Author(s): Hamid FAYOU ; Hamid DAALI
• Paper ID: 1705366
• Page: 188-198
• Published Date: 13-01-2024
• Published In: Iconic Research And Engineering Journals
• Publisher: IRE Journals
• e-ISSN: 2456-8880
• Volume/Issue: Volume 7 Issue 7 January-2024

Abstract

The aim of this article is to show the effect of the budget deficit on the dynamics of middle-income economies. We have applied a dynamic model on panel data with threshold effect estimation. To achieve this, we estimated the said model using the system generalized method of moments (GMM). The results of the linear model reveal that an increase in the budget deficit has a negative impact on economic dynamics, measured by the output gap with a coefficient of 0.2%. On the other hand, the results of the non-linear model enable us to determine the optimal budget deficit threshold, which has a positive impact on economic activity in these economies, at around 3.5% of GDP. These results imply that policy-makers should apply revenue rules that are generally associated with principles for the allocation of unplanned additional tax revenues, known as growth dividends. They are based on the idea that these dividends should not be used to finance additional public spending, but to reduce the budget deficit.

Keywords

Budget Deficit, GMM in System, Non-Linear Model, Growth

Citations

IRE Journals:
Hamid FAYOU , Hamid DAALI "Fiscal Deficit and Its Effects on Economic Growth: Empirical Evidence" Iconic Research And Engineering Journals Volume 7 Issue 7 2024 Page 188-198

IEEE:
Hamid FAYOU , Hamid DAALI "Fiscal Deficit and Its Effects on Economic Growth: Empirical Evidence" Iconic Research And Engineering Journals, 7(7)