Does fiscal policy accelerate economic growth in transition economies: the case of Republic of North Macedonia?
by Besnik Fetai; Abdylmenaf Bexheti; Liza Alili-Sulejmani; Veland Ramadani
International Journal of Public Sector Performance Management (IJPSPM), Vol. 7, No. 1, 2021

Abstract: The aim of this study is to investigate empirically the relationships and the causal link between fiscal policy and economic growth in the Republic of North Macedonia during the period 1990-2015. The study employs the quarterly dataset of public finance, which is classified according to Barro and Sala-i-Martin model in a small open economy. For this purpose, we employ vector error correction model (VECM - henceforth) in order to examine the relationships and causal link between fiscal policy and economic growth. The results of cointegration vector show that productive expenditure and non-distortionary revenues have long run coefficients of 0.86 and 0.84 respectively, indicating positive effect on real GDP, while distortionary revenues have long run coefficient of −1.14, indicating negative effect on real GDP in the long-run. However, unproductive expenditures are excluded from the long-run equilibrium, thus they do not have any effect on economic growth in the long-run. The Granger causality test shows that productive expenditures and non-distortionary revenues in the Granger sense cause real GDP.

Online publication date: Tue, 22-Dec-2020

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