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Public Finances and Long-term Growth in Europe: Evidence from a Panel Data Analysis

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Authors: Diego Romero-Ávila and Rolf Strauch


This paper addresses the question whether public finance reform can affect trend growth in the EU-15. Focusing on time series patterns, we investigate whether there have been persistent trends in economic growth and fiscal variables over the last 40 years. In addition, we estimate a distributed lag model, which 1) indicates that government size measured either with total expenditure or revenue shares, government consumption and direct taxation negatively affect growth rates of GDP per capita, while public investment has a positive impact, and 2) provides robust evidence that distortionary taxation affects growth in the medium-term through its impact on the accumulation of private capital.

Publication date: March 2008
European Journal of Political Economy
Volume 24, Issue 1, March 2008, Pages 172–191