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Growth, Governance, and Fiscal Policy Transmission Channels in Low-Income Countries

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  • Naoko C. Kojo
  • Mr. Arye L. Hillman
  • Mr. Emanuele Baldacci

Abstract

Private investment is the principal transmission channel through which fiscal policy affects growth in high-income countries. In low-income countries, governance and also other considerations suggest that the primary channel is factor productivity. Empirical results reported in this paper confirm this expectation: in low-income countries, factor productivity is some four times more effective than investment as a channel for increasing growth through fiscal policy. Although the private investment response to fiscal contraction may be minor, high-deficit, low-income countries can nonetheless benefit from a reduction in unsustainable fiscal deficits because of governance-related factor productivity responses that increase growth.

Suggested Citation

  • Naoko C. Kojo & Mr. Arye L. Hillman & Mr. Emanuele Baldacci, 2003. "Growth, Governance, and Fiscal Policy Transmission Channels in Low-Income Countries," IMF Working Papers 2003/237, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2003/237
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    WP; deficit; exchange rate; low-deficit dummy;
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