PapersFlow Research Brief
Fiscal Policy and Economic Growth
Research Guide
What is Fiscal Policy and Economic Growth?
Fiscal policy and economic growth refers to the study of how government spending, taxation, and public investment influence long-term economic expansion, particularly through infrastructure, optimal taxation, and regional development.
This field encompasses 167,055 works examining the effects of infrastructure development, government expenditure, and taxation on economic growth. Panel data methods, as in 'Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations' by Arellano and Bond (1991) with 31,878 citations, provide empirical tools for analyzing these relationships. Growth models like 'Increasing Returns and Long-Run Growth' by Romer (1986) with 19,605 citations link public policies to endogenous technological change.
Topic Hierarchy
Research Sub-Topics
Public Investment and Growth
Public investment and growth analyzes government capital spending on infrastructure's multiplier effects and crowding-out risks. Researchers use panel data and endogenous growth models to estimate long-run impacts.
Optimal Taxation Theory
Optimal taxation theory derives Ramsey rules and Mirrlees models for efficient tax structures minimizing distortions. Researchers incorporate heterogeneity, dynamics, and behavioral responses.
Fiscal Policy Multipliers
Fiscal policy multipliers quantify government spending and tax changes' GDP impacts across business cycles. Researchers apply DSGE, VAR, and narrative identification methods.
Infrastructure and Economic Growth
Infrastructure and economic growth examines transport, energy networks' productivity effects and regional spillovers. Researchers address endogeneity with IV strategies and satellite data.
Taxation and Regional Disparities
Taxation and regional disparities studies fiscal federalism, intergovernmental transfers, and tax competition's inequality effects. Researchers model spatial spillovers and convergence dynamics.
Why It Matters
Fiscal policy shapes economic growth by directing public spending toward infrastructure, human capital, and research, as analyzed in OG-USA and OG-Core models from PSLmodels for dynamic general equilibrium effects in the US. The IMF Fiscal Monitor, October 2025, 'Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth' shows reallocating expenditures within fixed budgets to infrastructure and R&D lifts output without increasing total spending. Texas A&M research demonstrates government-funded R&D drives long-term US productivity and innovation, while 'Fiscal Policy, Public Expenditure Composition, and Growth' highlights stability from revenue collection and expenditure allocation.
Reading Guide
Where to Start
'A Contribution to the Empirics of Economic Growth' by Mankiw, Romer, and Weil (1992), as it tests the augmented Solow model with human and physical capital against cross-country data, providing an accessible empirical foundation linking policies to growth.
Key Papers Explained
Arellano and Bond (1991) in 'Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations' establishes GMM for dynamic panels, extended by Blundell and Bond (1998) in 'Initial conditions and moment restrictions in dynamic panel data models' for better moment restrictions, and refined by Arellano and Bover (1995) in 'Another look at the instrumental variable estimation of error-components models'. Romer (1986) in 'Increasing Returns and Long-Run Growth' provides the theoretical growth model, empirically tested by Mankiw et al. (1992). Wooldridge (2001) synthesizes these in 'Econometric Analysis of Cross Section and Panel Data' for marginal effects.
Paper Timeline
Most-cited paper highlighted in red. Papers ordered chronologically.
Advanced Directions
IMF Fiscal Monitor chapters like 'Chapter 1. Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth' (2025) analyze expenditure efficiency gains. Preprints such as 'Fiscal Policy, Public Expenditure Composition, and Growth' explore composition effects. PSLmodels tools like OG-USA and OG-Core simulate policy scenarios in dynamic OLG frameworks.
Papers at a Glance
| # | Paper | Year | Venue | Citations | Open Access |
|---|---|---|---|---|---|
| 1 | Some Tests of Specification for Panel Data: Monte Carlo Eviden... | 1991 | The Review of Economic... | 31.9K | ✕ |
| 2 | Econometric Analysis of Cross Section and Panel Data | 2001 | RePEc: Research Papers... | 28.3K | ✕ |
| 3 | Social Capital in the Creation of Human Capital | 2000 | Elsevier eBooks | 21.8K | ✕ |
| 4 | Initial conditions and moment restrictions in dynamic panel da... | 1998 | Journal of Econometrics | 20.7K | ✕ |
| 5 | Increasing Returns and Long-Run Growth | 1986 | Journal of Political E... | 19.6K | ✕ |
| 6 | Another look at the instrumental variable estimation of error-... | 1995 | Journal of Econometrics | 18.9K | ✕ |
| 7 | A Contribution to the Empirics of Economic Growth | 1992 | The Quarterly Journal ... | 14.9K | ✕ |
| 8 | Econometric Analysis of Panel Data | 2021 | Springer texts in busi... | 14.5K | ✕ |
| 9 | Job Market Signaling | 1973 | The Quarterly Journal ... | 14.1K | ✕ |
| 10 | Crime and Punishment: An Economic Approach | 1968 | Journal of Political E... | 13.0K | ✕ |
In the News
Analysis: Government-Funded R&D Leads To Long-Term ...
Business & Government # Analysis: Government-Funded R&D Leads To Long-Term Economic Growth Texas A&M University research shows that federal science funding drives U.S. productivity and innovation.
Policies to Reduce Federal Budget Deficits by Increasing Economic Growth
Supported by the Alfred P. Sloan Foundation grant #G-2023-19633, the Lynde and Harry Bradley Foundation grant #20251294...
Chapter 1. Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth. Fiscal Monitor, October 2025. Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth
This chapter examines how policymakers can change the composition of public spending within a fixed total spending envelope to lift economic growth. It focuses on the potential gains to output f...
IMF Fiscal Monitor, October 2025. Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth
growth and rationalize public spending to improve living standards and alleviate fiscal pressures. This Fiscal Monitor explores how enhancing spending efficiency and strategically reallocating r...
Understanding the Relationship Between Changes to Federal Fiscal Policy and Near-Term Real GDP Growth
We introduce two measures which highlight the relationship between changes in federal fiscal policy and economic growth. First, we conduct a growth decomposition exercise to compute the
Code & Tools
{{ message }} @PSLmodels # Policy Simulation Library A library of open source models for public policy analysis * * 69followers * http://PSLmode...
The policy-wonks-api project addresses the challenge of analyzing economic and fiscal policies by leveraging AI-driven insights. Key features inclu...
OG-Core is an overlapping-generations (OG) model core theory, logic, and solution method algorithms that allow for dynamic general equilibrium anal...
OG-USA is an overlapping-generations (OG) model that allows for dynamic general equilibrium analysis of fiscal policy for the United States. OG-USA...
OG-UK is an overlapping-generations (OG) model of the economy of the United Kingom (UK) that allows for dynamic general equilibrium analysis of fis...
Recent Preprints
Fiscal Policy, Public Expenditure Composition, and Growth
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IMF Fiscal Monitor, October 2025. Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth
Fiscal Monitor explores how enhancing spending efficiency and strategically reallocating resources— particularly toward infrastructure, human capital, and research and development—can improve gro...
Chapter 1. Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth. Fiscal Monitor, October 2025. Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth
This chapter examines how policymakers can change the composition of public spending within a fixed total spending envelope to lift economic growth. It focuses on the potential gains to output f...
Chapter 1. Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth. Fiscal Monitor, October 2025. Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth
This chapter examines how policymakers can change the composition of public spending within a fixed total spending envelope to lift economic growth. It focuses on the potential gains to output f...
How fiscal policy affects financial development: Empirical ...
Fiscal policy, as the primary tool of macroeconomic management, plays an important role in influencing financial development (Chugunov & Pasichnyi, 2024). Through the collection of government reven...
Latest Developments
Recent developments in fiscal policy and economic growth research indicate that the US economy is projected to outperform economist forecasts with a 2.5% GDP growth in 2026, driven by tax cuts and expected Federal Reserve rate cuts, while global growth is forecasted to slow to around 3.3% in 2026 due to subdued investment and structural headwinds (Goldman Sachs, IMF, UNCTAD). Additionally, research highlights the importance of fiscal policy measures, such as the Federal Fiscal Impulse, in influencing near-term GDP growth, with ongoing analysis of how policy changes can support economic expansion (CBO, NBER).
Sources
Frequently Asked Questions
What methods are used to estimate fiscal policy effects on growth?
Generalized method of moments (GMM) in dynamic panel data models, as developed in 'Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations' by Arellano and Bond (1991), tests specifications after estimation. 'Initial conditions and moment restrictions in dynamic panel data models' by Blundell and Bond (1998) refines these for initial conditions. Wooldridge (2001) in 'Econometric Analysis of Cross Section and Panel Data' emphasizes marginal effects estimation.
How does public investment contribute to economic growth?
Public investment in infrastructure and R&D boosts long-term growth, per the IMF Fiscal Monitor, October 2025, by enhancing spending efficiency and allocation. Romer (1986) in 'Increasing Returns and Long-Run Growth' models knowledge as an input with increasing returns from such investments. Texas A&M analysis confirms federal science funding drives US productivity.
What role does taxation play in economic growth?
Optimal taxation policies balance revenue for public investment against growth distortions, central to this field's keywords like income tax and fiscal policy. Mankiw, Romer, and Weil (1992) in 'A Contribution to the Empirics of Economic Growth' augment Solow models with human capital accumulation affected by taxes. Recent preprints like 'How fiscal policy affects financial development' note fiscal tools shape stability and resource allocation.
What are key empirical tools for fiscal-growth analysis?
Panel data econometrics dominate, with Baltagi (2021) in 'Econometric Analysis of Panel Data' offering rigorous treatments cited 14,549 times. Arellano and Bover (1995) in 'Another look at the instrumental variable estimation of error-components models' improve IV methods for error components. These enable cross-country and regional disparity studies.
What is the current state of fiscal policy research on growth?
Recent IMF reports like 'Spending Smarter' (2025) focus on expenditure composition for growth within fixed budgets. Tools like OG-USA simulate US fiscal policy impacts via overlapping generations models. The field spans 167,055 works on infrastructure, taxation, and public investment.
Open Research Questions
- ? How can governments optimize public spending composition to maximize growth without raising total expenditure?
- ? What are the long-run dynamic general equilibrium effects of taxation changes on regional economic disparities?
- ? To what extent do infrastructure investments generate increasing returns through endogenous technological change?
- ? How do initial conditions in panel data models affect estimates of fiscal policy impacts on human capital accumulation?
- ? What fiscal reallocations best enhance financial development and stability in emerging economies?
Recent Trends
IMF Fiscal Monitor, October 2025, emphasizes reallocating public spending to infrastructure, human capital, and R&D for growth within fixed budgets, as in 'Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth'. Texas A&M links federal R&D funding to sustained US productivity.
2025Preprints like 'Fiscal Policy, Public Expenditure Composition, and Growth' and 'How fiscal policy affects financial development' (Chugunov & Pasichnyi, 2024) highlight expenditure impacts on stability, building on 167,055 works without specified 5-year growth.
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