966
Number: 05/2016
Author(s): Aygun Garayeva, Gulzar Tahirova
Language: English
Date: Jule 07, 2016
This paper examines the impact of the quality of fiscal institutions on the effectiveness of government expenditures. The cyclical behavior of government spending and output, obtained from HP filtering, is used as a proxy for the effectiveness of public spending, and fiscal policy is considered to be effective, if it is countercyclical. The impact of institutional quality on the cyclicality of government spending is assessed, employing different variables to proxy the quality of economic and political institutions separately. We also control for countries’ access to domestic and foreign financial markets. Empirical estimation is conducted using panel data fixed effects method, for the yearly time period of 1996-2013, in the sample of 45 countries. Countries are divided between 3 groups of countries – Western European, Eastern European and CIS countries – with each one of these groups representing a different development stage, to find out whether the determinants of public spending efficiency differ between countries in different development stages. The main result of the empirical research is that in developed countries the main determinants of government spending effectiveness are found to be the quality of economic institutions, but access to financial markets is more pronounced in developing countries. On the other hand, evidence supports the view that increasing democracy increases procyclicality and thus, reduces effectiveness of government spending.
Keywords: fiscal policy, procyclicality, institutional quality, panel data, fixed effects
JEL classification: E62, E32, E02, D73
