Threshold effects of fiscal policy on economic growth in developing countries

We examine the relation between fiscal policy and economic growth for a panel of 40 developing countries over the period of 1990 to 2012 using eight macroeconomic variables: real GDP, budget deficit, current government spending, national saving, inflation rate, total investment, public debt, and current account balance. The study documents a double threshold effect of the fiscal balance. The first one is at a level of the deficit around 4.8% of GDP; the second one is at the fiscal surplus level of 3.2% of GDP meaning that economic growth would be negatively affected when exceeding these two different levels. The result also show that the sign of the relation between budget deficit and economic growth is conditioned by the level of total investment i.e. only for total investment higher than 23%, there exists a positive relation. However, it becomes negative, when investment falls below this threshold.