Fiscal Policy, Total Factor Productivity and Economic Growth in Advanced Economies

This paper empirically examines the role of fiscal policy in explaining the persistence of weak economic growth in most developed economies since the recent financial/economic crisis. To this end, we estimate the impact of fiscal policy variables on total factor productivity and its implications for economic growth rates over the 2000-2015 period by applying a random varying coefficients growth-accounting model to data from 27 OECD countries classified into four groups according to their total government outlays relative to GDP. We also divide the period under study into two sub-periods of 2000-2007 and 2008-2015 in an attempt to shed some light on the sluggish growth after the recent financial/economic crisis. Our group-wise as well as period-wise results indicate that economic growth is impacted adversely by the size of total government outlays relative to GDP while the growth of government consumption has an unambiguously positive impact on total factor productivity and economic growth. The increase in the former and the decrease in the latter over the 2008-2015 sub-period might explain why growth has been sluggish over this sub-period.