Threshold Effects of Fiscal Policy on Economic Activity in Developing Countries

Abstract

<p>The aim of this paper is to investigate the relationship between fiscal policy and economic growth for a panel of 40 developing countries for the period 1990 – 2012 with a focus on a comparative analysis between Morocco and the panel. The variables used are real GDP, budget deficit, current government spending, national saving, inflation rate, total investment, public debt and current account balance. The main findings are: <em>First</em>, there is evidence of a double threshold effect of the fiscal balance. When exceeding a budget deficit level of 4.8% of GDP or a fiscal surplus level of 3.2% of GDP, economic growth is negatively affected. <em>Second</em>, the sign of the relationship between budget deficit and economic growth is conditioned by the level of total investment. For values of total investment higher than 23%, it follows that there is a positive relationship. However, it becomes negative, when investment falls below this threshold. <em>Third</em>, from Morocco’s perspective, analysis of threshold effects suggested that above 4.8% of budget deficit, average growth rate falls by 2.1%, while median growth falls by 1.5%.</p>