Does Fiscal Policy Boost Economic Growth in the LDCs? The Role of Fiscal Ratings and Key Fiscal Variables.

Abstract

Fiscal policy is an important tool for stimulating economic growth. Thus, in this paper, we assess empirically the role of the World Bank's Country Policy so-called fiscal policy rating variables (fiscal rating, debt rating and revenue rating) on economic growth in the poorest countries of the world, the Least Developed Countries (LDCs), during the period of 1990–2022. We also investigate the role of key fiscal variables on economic growth (government debt, expenditure and tax revenue). We find that most of fiscal policy rating variables strongly and positively enhance economic growth in the LDCs. In addition, we find that government debt and tax revenues significantly influence economic growth, and government effectiveness positively influences economic growth. The results are robust by applying a fixed effects model and a GMM model.