¹Fiscal Affairs Department, International Monetary Fund, 700 19th Street, N. W., Washington D.C., 20431, USA. E-mail: sgupta@imf.org

Abstract

This paper analyzes the relationship between fiscal adjustment and real GDP growth in a panel of 26 transition economies during 1992–2001. It finds a positive and statistically significant relationship between fiscal adjustment and real GDP growth that is robust to different model specifications and estimation methods when initial conditions, stabilization policies, and institutions are controlled for. Fiscal adjustment promotes growth in both the short and the long run in countries that have not yet attained macroeconomic stability. However, for countries that have achieved credible stabilization, additional fiscal adjustment is unlikely to yield large benefits in growth.