Fiscal Policy and Debt Dynamics in Developing Countries

Using a new tax database for 28 countries and a variety of econometric methods, this paper contributes to the debate on the effects of fiscal policy on economic activity in a number of ways. The analysis finds that tax cuts have a stimulative effect on economic growth in developing countries. Lowering the personal income tax rate by 1 percentage point, or cutting revenues by 1 percent of gross domestic product increases gross domestic product by 0.3-0.4 percent on impact and 0.8 percent in the long run. The author finds that cuts in personal income taxes are more effective in stimulating growth than cuts in corporate or valued added tax rates. The author incorporates debt dynamics into a fiscal vector autoregression model for a number of developing countries. Existing estimates of the effects of fiscal policy on growth use linear time-series methods, which may assess the effects of fiscal policy along a debt-path that is unsustainable. Incorporating the non-linear relationship between government expenditure, taxes, and debt alters estimates of the impact of fiscal policy on gross domestic product in several countries. In Brazil, for example, conventional time-series methods may overstate the effects of fiscal policy on gross domestic product, by ignoring the detrimental effects of debt accumulation.

Bibliographic Details

Main Author:	Ilzetzki, Ethan
Language:	English
Published:	2011-05-01
Subjects:	ADDED TAX, AUTOREGRESSION, BOND, CD, CLOSED ECONOMIES, CORPORATE INCOME TAX, CORPORATE TAX, CORPORATE TAX RATE, CORPORATE TAXES, DEBT, DEBT ACCUMULATION, DEDUCTIONS, DEVELOPING COUNTRIES, DEVELOPMENT POLICY, ECONOMIC OUTLOOK, ELASTICITY, EXCHANGE RATE, EXPENDITURES, FEDERAL TAX, FISCAL POLICY, FIXED EXCHANGE RATES, FLEXIBLE EXCHANGE RATES, FOREIGN CURRENCY, GDP, GINI COEFFICIENT, GOVERNMENT ACCOUNTS, GOVERNMENT EXPENDITURE, GOVERNMENT REVENUE, GROSS DOMESTIC PRODUCT, HOUSEHOLD INCOME, INCOME TAX, INCOME TAXES, INFLATION, INTEREST PAYMENTS, INTEREST RATE, INTERNATIONAL BANK, INTERNATIONAL FINANCE, M2, MACROECONOMICS, MULTIPLIERS, NET DEBT, OPEN ECONOMIES, OUTPUT, PERSONAL INCOME, PERSONAL INCOME TAX, PERSONAL INCOME TAXES, PROGRESSIVE TAX, PUBLIC FINANCE, REGRESSIVE TAX, SALES TAX, SALES TAXES, SOCIAL SECURITY TAX, STATUTORY TAX, STATUTORY TAX RATES, TAX, TAX BRACKETS, TAX CHANGES, TAX CREDIT, TAX CUTS, TAX RATE, TAX RATES, TAX REVENUE, TAX REVENUES, TRADING, UNEMPLOYMENT, UNEMPLOYMENT RATE, VALUE ADDED, VALUE ADDED TAX, WORLD DEVELOPMENT INDICATORS,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110519140736 https://hdl.handle.net/10986/3429
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