Research Findings Seminar on "Fiscal Policy, Institutions, and Economic Growth"

Why is fiscal policy more effective in some countries than in others? My dissertation addresses the question from an institutional approach. Among the first ones who incorporate economic institutions into a growth model with fiscal policy, I assume that property rights protection affects the distribution of capital stock between private sector and public sector. My model shows that stronger security of property rights can either enhance or reduce the growth impact of government investment, depending on the relationship between private and public saving of a country. To confirm the theoretical argument proposed, I conduct two empirical cross-country studies. Accounting for the growth effect of fiscal policy, I find that government investment benefits long-term growth but that effect is lower in countries with greater economic freedom. Government consumption is not beneficial to long-term growth but its negative impact is lower when a country is more economically free. Accounting for the stimulation impact of fiscal policy over business cycles and a broader set of economic and political institutions, I find that consumption-based stimulus is more effective than the investment-based, and countries with better economic institutional quality have more effective fiscal stimulus. Those findings are important for governments to design fiscal policy and institutional reform to achieve a better economic performance.