Effects Of Fiscal Policy On Growth

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Effects of Fiscal Policy on growth




Background of the Study1

Problem Statement1

Purpose of the Study2

Research Hypothesis2

Significance of the Study3

Disposition of Dissertation3


Fiscal Policy5

Empirical Evidence6

Survey of Non-Fiscal Variable Elasticities of Fiscal Variables9



Background of the Study

In aggregate terms the worldwide growth of foreign direct investment (FDI) is important and has phenomenal within the last two decades. In order to maximize the market share in the international market the industries are trying to grow faster than trade flows. Global sales of foreign affiliates estimated the value of international production at $9.5 trillion in 1997. The estimated amount indicated that the effect of international production depends on the interdependence of the world economy (Nikos 2009 3).

There were already an abundant number of studies have been carried out to dealt with the question of public finance and growth. The previous research findings of Zagler (2003) indicated that there is no relationship exists among fiscal indicator and growth, as per regression analysis. Becker & Stevenson (2005) carried out a sensitivity analysis by focusing on the government spending and concluded the same as Zagler (2003).

Problem Statement

Fiscal policy is the central theme of macroeconomics for the long run of the growth process. There were a number of researchers who examine different aspects of fiscal policy as an engine of profit maximization and economic growth. The main theme of this research study is to contribute to the impact of fiscal policy on growth. The channels through which fiscal policy affects economic growth are very different. First, the public sector provides public goods productive affect the marginal productivity of private capital in the models of Blinder and Solow (2005) and Duval and Vogel (2007). For example, the government should provide an adequate level of public infrastructure for satisfactory development. Second, higher taxes of income or capital discourage the accumulation of productive factors on net profitability by reducing taxes, while subsidies incentive investment are physical and human capital externalities or correcting imperfections market. A third way is through subsidies for R&D in order to consider externalities as found in models of Blinder and Solow (2005), Nikos (2009) or Johansson et al., (2008). The fiscal policies with a redistributive purpose can have positive or negative impact, reducing imperfections in credit markets, ensuring property rights or mitigating social conflicts that may arise from unequal distribution of productive resources and wealth.

Purpose of the Study

The purpose of this research study is to examine the effect of fiscal policy on growth. To accomplish this research aim data set from 22 OECD countries will be analyze for the years 1995-2010. Regression and correlation analysis is carried out to examine the impact of fiscal policy on growth.

Research Hypothesis

This research study examines the following research hypothesis.

H1o: There isn't a significant impact of revenue and expenditure on GDP.

H1a: There is a significant impact of revenue and expenditure on GDP.

H2o: There isn't a significant impact of inflation and investment on GDP.

H2a: There is a significant impact of inflation and investment on ...
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