INSTABILITY OF FISCAL POLICY, FINANCIAL DEVELOPMENT, AND ECONOMIC GROWTH

Based on the findings from theoretical research an empirical model is estimated aimed to assess the impact of the fiscal policy instability on economic growth on the basis of a quantitative analysis. First, in order to estimate the measures of the volatility of fiscal policy, a fiscal policy reaction function is estimated. Then, these measures are used to investigate the impact of fiscal instability on economic growth and the impact of the degree of financial development on the strength of this relationship at the macroeconomic level. The analysed sample includes more than 150 countries, covering the period of 1960-2005. The results of the analysis suggest that the use of discretionary fiscal policy negatively affects the rate of economic growth. The first part of the article presents a discussion on the measures of fiscal instability. The second part contains a discussion of the literature. The third part presents the results of empirical research carried out by the author. The last part includes conclusions from the analysis.