The Analysis of Long Run Growth Oriented Fiscal Policy
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Abstract
One of the most debated questions of growth theory is whether or not government policies can be used to influence the long run growth rate of the economy. Neoclassical theory states economic policy actions can only have short run effects on the growth rate of the economy, but it can’t change the long run perspectives for growth.
Endogenous growth theory integrated (among several other factors) fiscal policy to the growth models, enabling it to influence long run growth performance. According to these theories some elements of the government budget have positive effects on the long run growth rate of the economy (productive expenditures, and budget balance), while others are neutral (non-distortionary taxation and unproductive expenditures), or have negative consequences for growth (distortionary taxation).
In my paper I summarize the theoretical and empirical literature of the relationship between fiscal policy and long run economic growth shortly. Then I continue my work with using the parameter estimates of a third generation study of developed countries (which considers the budget constraint as well) to evaluate the fiscal policy actions taken in Hungary and in Ireland, concentrating on the overall long run trends in the last one and a half decade. I will try to give explanation for the differences in the two countries’ reactions to some of the similar fiscal policy changes mapped during my research.
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