THE INTERACTION BETWEEN FISCAL POLICY AND ECONOMIC GROWTH: CASE OF OECD COUNTRIES

For the sustainable development of any company it is crucial to recognize macroeconomic performance and its changes. Without doubt, the economic development affects the gains and decision making of them. Cognition of the interaction between fiscal policy and economic growth can help companies to react more appropriately and faster, especially during current sovereign debt crisis. The aim of this paper is to describe the interaction between taxation, government expenditures, and economic growth and to find out how long these interactions persist in the economy of OECD members. To meet these goals a panel VAR model estimated by GMM is used to construct an impulse-response function. The analysis is performed for 34 OECD countries in the period between 2000 and 2012. The results show that it lasts approximately five years till the GDP growth rate returns to its initial level after a temporary fiscal shock. The impact of taxation is always in the opposite direction to the effect of government expenditures. Permanent changes of fiscal variables lead to a permanent change of the steady growth rate. Taxation is harmful to growth, while expenditures appear to be productive. There is a hint of regressive tax burden among OECD countries when the persistent increase of the economic growth is taken into account. For the company's adaptability it appears to be the most important thing to distinguish between temporary and persistent changes.