Fiscal Policy and Debt Dynamics in Developing Countries
Using a new tax database for 28 countries and a variety of econometric methods, this paper contributes to the debate on the effects of fiscal policy on economic activity in a number of ways. The analysis finds that tax cuts have a stimulative effec...
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110519140736 http://hdl.handle.net/10986/3429 |
| Summary: | Using a new tax database for 28
countries and a variety of econometric methods, this paper
contributes to the debate on the effects of fiscal policy on
economic activity in a number of ways. The analysis finds
that tax cuts have a stimulative effect on economic growth
in developing countries. Lowering the personal income tax
rate by 1 percentage point, or cutting revenues by 1 percent
of gross domestic product increases gross domestic product
by 0.3-0.4 percent on impact and 0.8 percent in the long
run. The author finds that cuts in personal income taxes are
more effective in stimulating growth than cuts in corporate
or valued added tax rates. The author incorporates debt
dynamics into a fiscal vector autoregression model for a
number of developing countries. Existing estimates of the
effects of fiscal policy on growth use linear time-series
methods, which may assess the effects of fiscal policy along
a debt-path that is unsustainable. Incorporating the
non-linear relationship between government expenditure,
taxes, and debt alters estimates of the impact of fiscal
policy on gross domestic product in several countries. In
Brazil, for example, conventional time-series methods may
overstate the effects of fiscal policy on gross domestic
product, by ignoring the detrimental effects of debt accumulation. |
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