Fiscal Deficit and its effects on economic growth

Abstract

The main purpose of this paper is to assess the impact of the deficit on GDP growth for the Eurozone area, using panel data for a period from 1995 to 2015, with a total of 257 observations. In order to conduct the study and come up with results, we have used a multiple linear regression model with the least-squares regression. Consequently, in order to test the data used in the model, we have applied diagnostic tests, such as the Durbin-Watson test to analyze the correlation of serial correlation, as well as the Breusch-Pagan test for heteroskedasticity. The test results prove that there is no heteroskedasticity and at the same time there are strong indications that the model has no relation between serial correlation. The results presented in our study show that the variables, deficit ratio to GDP, is statistically significant with a positive sign and as a result, we have the growth of the deficit ratio with GDP having a positive impact on the economic growth ratio. Keywords: Fiscal deficit, GDP Growth Rate, Correlation, Regression