| Summary: | In the recent decade, most governments pursued an expansionary fiscal policy, while
most economies witnessed a decline in growth rates. Economic growth is an important
justification for government intervention in the economy. Recent global economic crisis
in 2008 and government failure to achieve economic growth have cast doubt on the
viability of fiscal policy. Some economists believe that one of the main causes of
government failure to achieve economic growth is corruption. According to the World
Bank, corruption is an obstacle to its goals in reaching sustainable development. This
study aims to investigate the linear and nonlinear effect of fiscal policy, the linear effect
of corruption, and the effect of the interaction between corruption and fiscal policy on
economic growth based on development level. The study employs the system GMM
approach and panel data of the countries of the world whose data are available (166
countries: 28 low, 41 lower-middle, 47 upper-middle 50 high-income economies)
covering the period time from 1998 to 2017, where the cross-country is larger than time
series (N > T). The method of study involves regression both at level and at first
difference into a system. The underlying theory is derived from endogenous growth
models. The linear effect of fiscal policy on economic growth shows mixed results.
Government spending has a negative impact, except for low-income economies, which
is statistically insignificant. Taxation has a positive effect, except for the upper-middle
income economies, which is negative. Government debt has a negative effect only in
the lower-middle and high-income economies. Each of the nonlinear effect of fiscal
policy, the linear effect of corruption, and the effect of the interaction between
corruption and fiscal policy on economic growth is negative and statistically significant
regardless of the development level. Unlike the existing literature that investigates
either the effect of corruption or fiscal policy on economic growth, this study
contributes to the literature by examining the impact of the interaction between them on
economic growth. The study contributes to the literature by studying the nonlinear effect
of fiscal policy on economic growth, as few studies have considered this relationship.
The study also contributes to the literature by combining the fiscal policy instruments
in a model where most of the previous studies focus only on government spending.
Moreover, unlike previous studies, this study contributes to the existing literature by
taking into consideration the development level of countries. Furthermore, the study
uses big panel data where the sample utilized consists of data from 166 countries over
20 years. Besides, the study employs an advanced technique for analysis (GMM
approach), which has more advantages compared to the traditional techniques. In order
to achieve higher levels of economic growth, governments should strive to eliminate
corruption, reduce both government spending and public debt, and boost taxation except
upper-middle-income economies that have to cut taxes. The study conducts macro
analysis, and the findings obtained are only general trends; therefore, each country
should be studied separately to take into account its own circumstances. However,
governments, decision-makers, and researchers should determine and choose the
optimal mixed of fiscal policy instruments that achieve a higher economic growth rate
for each country.
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