Abstract:
The present paper examines the mitigating effect of monetary and fiscal policies on the “Growth Laffer curve” (GLC) using a panel data of 38 high income countries over the period 2003-2012. Adopting generalised method of moments (GMM) estimators, the paper finds evidence substantiating the presence of an inverted-U GLC. Moreover, the evidence suggests that the GLC shifts downward by employing expansionary monetary and fiscal policies and that the tax rate turning point beyond which economic growth decline is higher in countries with higher level of debt-to-GDP ratio and money supply. These results are robust to addition of alternative controlled variables in the GLC specification. Our results strengthen the case for heterogeneous GLC across countries. As an implication, a government may enhance the efficiency within the “fiscal space” by either raising the productivity of public spending or cutting fiscal debt. Moreover, using money as a financing instrument should be carefully supervised due to its impact in generating large inflation rates and distorting capital accumulation and economic growth.
Machine summary:
"Moreover, the evidence suggests that the GLC shifts downward by employing expansionary monetary and fiscal policies and that the tax rate turning point beyond which economic growth decline is higher in countries with higher level of debt-to-GDP ratio and money supply.
1. Model specification and data To test empirically the presence of GLC in a panel of 38 high income countries (the list of countries included in our sample are presented in Table 1) over the period 2003-2012 1 , we adopt a standard quadratic relation between GDP per capita growth() and tax rate measured as tax revenue in % of GDP , written as: = + 1 + 2 2 + 3 + (1) Where subscripts and refer to country and year respectively, is a country-specific effect, 1 , 2 and 3 are the slope parameters to be estimated, is the model's error term and is a vector of relevant control variables (to be discussed below).
Debt ratio and M2 ratio are considered as suitable fiscal and monetary policy indicators respectively, since these variables affect the ways of financing public spending in these countries through issuing debt or seigniorage and then can deform GLC (Roy and Heuty, 2009 and Ehrhart et al.
More specifically, the paper empirically assesses the impact of monetary and fiscal policies on GLC specification and the way these variables affect tax rate threshold point using panel GMM estimators."