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Fiscal Deficits and Growth in Developing Countries

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  • Christopher Adam
  • David Bevan

Abstract

This paper examines the relation between fiscal deficits and growth for a panel of 45 developing countries. Based on a consistent treatment of the government budget constraint, it finds evidence of a threshold effect at a level of the deficit around 1.5% of GDP. While there appears to be a growth payoff to reducing deficits to this level, this effect disappears or reverses itself for further fiscal contraction. The magnitude of this payoff, but not its general character, necessarily depends on how changes in the deficit are financed (through changes in borrowing or seigniorage) and on how the change in the deficit is accommodated elsewhere in the budget. We also find evidence of interaction effects between deficits and debt stocks, with high debt stocks exacerbating the adverse consequences of high deficits.

Suggested Citation

  • Christopher Adam & David Bevan, 2002. "Fiscal Deficits and Growth in Developing Countries," Economics Series Working Papers 120, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:120
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    More about this item

    Keywords

    fiscal defcits; growth; threshold effects; developing countries;
    All these keywords.

    JEL classification:

    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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