Monetary and fiscal policies and the Growth Laffer Curve: panel data evidences

Zare, Roohollah; Arman, Seyed Aziz

doi:10.22055/jqe.2015.11880

Monetary and fiscal policies and the Growth Laffer Curve: panel data evidences

https://doi.org/10.22055/jqe.2015.11880

Volume 12, Issue 1 - Serial Number 1
Winter 2015

Pages 79-91

Quarterly Journal of Quantitative Economics (JQE)

Document Type : Research Paper

Authors

Roohollah Zare ¹

Seyed Aziz Arman ²

¹ Department of economics, Beyza branch, Islamic Azad University, Beyza, Iran

² Department of Economics, Faculty of Economics and Social Sciences, Shahid Chamran University, Ahvaz, Iran

Abstract

The present paper examines the mitigating effect of monetary and fiscal policies on the “Growth Laffer curve” (GLC) using a panel data of 38 high income countries over the period 2003-2012. Adopting generalised method of moments (GMM) estimators, the paper finds evidence substantiating the presence of an inverted-U GLC. Moreover, the evidence suggests that the GLC shifts downward by employing expansionary monetary and fiscal policies and that the tax rate turning point beyond which economic growth decline is higher in countries with higher level of debt-to-GDP ratio and money supply. These results are robust to addition of alternative controlled variables in the GLC specification. Our results strengthen the case for heterogeneous GLC across countries. As an implication, a government may enhance the efficiency within the “fiscal space” by either raising the productivity of public spending or cutting fiscal debt. Moreover, using money as a financing instrument should be carefully supervised due to its impact in generating large inflation rates and distorting capital accumulation and economic growth.

Keywords

Growth Laffer curve

taxes

Monetary policy

Fiscal policy

GMM

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