New Evidence on Fiscal Adjustment and Growth in Transition.pdf

WP/06/244 New Evidence on Fiscal Adjustment and Growth in Transition Economies Alex Segura-Ubiergo, Alejandro Simone, and Sanjeev Gupta © 2006 International Monetary Fund WP/06/244 IMF Working Paper Fiscal Affairs Department New Evidence on Fiscal Adjustment and Growth in Transition Economies Prepared by Alex Segura-Ubiergo, Alejandro Simone, and Sanjeev Gupta1 Authorized for distribution by Teresa Ter-Minassian October 2006 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper analyzes the relationship between fiscal adjustment and real GDP growth in a panel of 26 transition economies during 1992–2001. Unlike most previous studies using cross-country regressions, the paper finds a positive and statistically significant relationship between fiscal adjustment and growth that is robust to different model specifications and estimation methods. The paper also presents country experiences to delve deeper into the mechanisms that may underlie this statistical relationship. JEL Classification Numbers: C33, E62, H11, H60 Keywords: fiscal adjustment, growth, transition economies, fiscal policy Authors’ E-Mail Addresses: aseguraubiergo@imf.org; asimone@imf.org; sgupta@imf.org 1 The authors would like to thank for their help