Fiscal Policy And Economic Growth In PIIGS Countries: An Empirical Assessment

Abstract

This paper studies the dynamic relationships between government revenues, government expenditures and economic growth in Portugal, Italy, Ireland, Greece and Spain (PIIGS henceforth). To this end we use a multivariate econometric model based on the Toda-Yamamoto (1995) procedure. Our empirical results reveal a bidirectional relationship between government revenues and government expenditures in Portugal only. Greece is the only county in which government expenditures Granger cause government revenues. Therefore, there is no evidence for spend-and-tax hypothesis for three countries of our sample. For Italy there is a unique unidirectional relationship running from government revenues to GDP while a unique unidirectional relationship was found running from government revenues to government expenditures for Ireland. Results for Spain show a double bidirectional relationships running from government revenues to GDP and from government expenditures to GDP. Moreover, there exists a unidirectional causal relationship between government revenues and government expenditures. Again, there is no evidence for tax-and-spend hypothesis for three countries of our sample.