The effectiveness of fiscal policy: contributions from institutions and external debts

Abstract

Purpose: The effectiveness of fiscal policy is an interesting field in literature of macroeconomics. The purpose of this paper is to investigate the effects of fiscal policy on economic growth under contributions from the differences in institutions and external debt levels. Design/methodology/approach: The authors use panel data from 2002 to 2014 from 20 emerging markets and use GMM estimators for unbalanced panel data. Findings: The results show positive growth effects of fiscal policy across emerging markets in the examined periods. Notably, the improvement in institutions promotes higher crowding-in effects of fiscal policy. In addition, this paper finds interesting evidences that the external debt has non-linear effects on economic growth, whereas the heterogeneous effects of fiscal policy on economic growth as positive effects in low indebted level and negative effect in high indebted level may explain the mechanism of this non-linear relationship. Originality/value: This study proposes the non-linear relationship of fiscal growth effects in emerging economies under the dynamic of debt levels.