Error correction model for analysis of influence of fiscal policy on economic growth in EU
Ensuring fiscal sustainability in the Member States of the European Union has become an extremely important goal in the current economic context. The formulation of appropriate policies can lead to fiscal consolidation, and the manifestation of a fiscal shock with direct implications on national budgets and can be mitigated by a rational approach. The aim of this paper is to examine issues related to ensuring fiscal sustainability and to identify the necessary fiscal policy instruments in this regard. Using a data set for EU member states for the period 2000–2019, we researched fiscal policy objectives for economic development and the volume of public and private investment. The error correction model (ECM) was used as a derivative of the autoregressive model with distributed lags (ARDL) to assess the short-term variation of Gross Domestic Product under the influence of seven fiscal indicators. The study highlights the aspects of fiscal policies at EU level as well as the correlation between economic development and the fiscal behaviour of the authorities. We contribute to the existing literature by providing empirical evidence on the existence of a direct relationship between economic growth and the volume of private investment.
First published online 01 March 2022
This work is licensed under a Creative Commons Attribution 4.0 International License.
Ali, U., Shan, W., Wang, J. J., & Amin, A. (2018). Outward foreign direct investment and economic growth in China: Evidence from asymmetric ARDL approach. Journal of Business Economics and Management, 19(5), 706–721. https://doi.org/10.3846/jbem.2018.6263
Anderson, E., Inoue, A., & Rossi, B. (2016). Heterogeneous consumers and fiscal policy shocks. Journal of Money, Credit and Banking, 48(8), 1877–1888. https://doi.org/10.1111/jmcb.12366
Arsic, M., Nojkovic, A., & Randjelovic, S. (2017). Determinants of discretionary fiscal policy in Central and Eastern Europe. Economic Systems, 41(3), 367–378. https://doi.org/10.1016/j.ecosys.2016.10.003
Bahmani-Oskooee, M., & Fariditavana, H. (2016). Nonlinear ARDL approach and the J-curve phenomenon. Open Economies Review, 27(1), 51–70. https://doi.org/10.1007/s11079-015-9369-5
Barro, R. J., & Sala-i-Martin, X. (1992a). Convergence. Journal of Political Economy, 100(2), 223–251. https://doi.org/10.1086/261816
Barro, R. J., & Sala-i-Martin, X. (1992b). Public finance in models of economic growth. Review of Economic Studies, 59(4), 645–661. https://doi.org/10.2307/2297991
Bhattarai, K., & Trzeciakiewicz, D. (2017). Macroeconomic impacts of fiscal policy shocks in the UK: A DSGE analysis. Economic Modelling, 61, 321–338. https://doi.org/10.1016/j.econmod.2016.10.012
Cavallari, L., & Romano, S. (2017). Fiscal policy in Europe: The importance of making it predictable. Economic Modelling, 60, 81–97. https://doi.org/10.1016/j.econmod.2016.09.008
Cheung, Y. W., & Lai, K. S. (1993). Finite-sample sizes of Johansen’s likelihood ratio tests for cointegration. Oxford Bulletin of Economics and statistics, 55(3), 313–328. https://doi.org/10.1111/j.1468-0084.1993.mp55003003.x
Chugunov, I., & Pasichnyi, M. (2018). Fiscal stimuli and consolidation in emerging market economies. Investment Management and Financial Innovations, 15(4), 113–122. https://doi.org/10.21511/imfi.15(4).2018.09
Chugunov, I., Pasichnyi, M., Koroviy, V., Kaneva, T., & Nikitishin, A. (2021). Fiscal and monetary policy of economic development. European Journal of Sustainable Development, 10(1), 42. https://doi.org/10.14207/ejsd.2021.v10n1p42
Dobrotă, G. (2010). Direct taxation in Romania and European Union. Annals – Economy Series, Constantin Brancusi University, 3, 21–30.
Engle, R. F., & Granger, C. W. J. (1987). Co-integration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251–276. https://doi.org/10.2307/1913236
Gunasinghe, C., Selvanathan, E. A., Naranpanawa, A., & Forster, J. (2020). Rising income inequality in OECD countries: Does fiscal policy sacrifice economic growth in achieving equity? The European Journal of Development Research, 33, 1840–1876. https://doi.org/10.1057/s41287-020-00322-8
Johansen, S., & Juselius, K. (1992). Testing structural tests in a multi-variate cointegration analysis of the PPP and the UIP for UK. Journal of Econometrics, 53(1–3), 211–244. https://doi.org/10.1016/0304-4076(92)90086-7
Joshua, U. (2019). An ARDL approach to the government expenditure and economic growth nexus in Nigeria. Academic Journal of Economic Studies, 5(3), 152–160.
Kutasi, G., & Marton, A. (2020). The long-term impact of public expenditures on GDP-growth. Society and Economy, 42(4), 403–419. https://doi.org/10.1556/204.2020.00018
Mankiw, G., Romer, N. D., & Weil, D. N. (1992). A contribution to the empirics of economic growth. Quarterly Journal of Economics, 107(2), 407–437. https://doi.org/10.2307/2118477
Mourougane, A., Botev, J., Fournier, J. M., Pain, N., & Rusticelli, E. (2016). Can an increase in public investment sustainably lift economic growth? (OECD Economics Department Working Papers, No. 1344). OECD Publishing. https://doi.org/10.1787/18151973
Nkoro, E., & Uko, A. K. (2016). Autoregressive Distributed Lag (ARDL) cointegration technique: Application and interpretation. Journal of Statistical and Econometric Methods, 5(4), 63–91.
Okoh, S. A., Amadi, U., Ojiya, E. A., & Ani, E. C. (2019). Impact of fiscal policy on agricultural productivity in Nigeria: An empirical analysis. Journal of Business School, 2(3), 7–27. https://doi.org/10.26677/TR1010.2019.75
Pasichnyi, M. (2020). Fiscal policy and economic development. University Economic Bulletin, 44, 153–164. https://doi.org/10.31470/2306-546X-2020-44-153-164
Pesaran, M. H., & Shin, Y. (1999). An autoregressive distributed-lag modelling approach to cointegration analysis. In S. Strøm (Ed.), Econometrics and Economic Theory in the 20th century: The Ragnar Frish Centennial Symposium (pp. 371–413). Cambridge University Press. https://doi.org/10.1017/CCOL521633230.011
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. https://doi.org/10.1002/jae.616
Simbachawene, M. (2018). Taxes, financing and spending synchronization in Tanzania: ARDL bound test and impulse response function. International Journal of Finance and Accounting, 7(3), 67–75.
Solow, R. M. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics, 70(1), 65–94. https://doi.org/10.2307/1884513
Stawska, J., Jaźwiński, I., Mourao, P. R., & Rupeika-Apoga, R. (2018). Expenditure on public services in the countries of the European Union. Determinants of fiscal policy and public governance. European Journal of Service Management, 28(2), 429–437. https://doi.org/10.18276/ejsm.2018.28/2-51
Suescún, R. (2020). A tool for fiscal policy planning in a medium-term fiscal framework: The FMM-MTFF model. Economic Modelling, 88, 431–446. https://doi.org/10.1016/j.econmod.2019.09.053
Vodă, A. D., & Cristea, L. A. (2018). Economic and fiscal implications in the post-crisis period. Annals of Faculty of Economics, University of Oradea, Faculty of Economics, 1(2), 75–83.