Investigating Government lending during an economic crisis: a comparative analysis of four EU countries

ABSTRACT

Many economists argue that fiscal balance (i.e. preventing fiscal deficits and establishing rules for government lending) positively affects the growth rate. Several studies document a strong correlation between these two variables based on the Ricardian equivalence theorem and the crowding-out effect. It may be argued that high growth rates lead to a positive fiscal balance, while lower/negative growth rates lead to deficits (but not vice versa). This study examines this cause-and-effect relationship via a sample of four EU countries that have been affected by the economic crisis. Specifically, a Granger causality analysis captures the linear interdependencies among multiple time series to determine the causal relation between the budget deficit and the GDP growth rates for Greece, Italy, Spain, and Portugal. The results show that no clear rule governs the cause-and-effect relationship between the GDP growth rates and net government lending rates (as a percentage of GDP). Moreover, the literature supports the idea that fiscal improvement may lead to economic growth, while improving net government lending leads to an increase in the GDP growth rate. This study suggests some useful fiscal policies to apply during a crisis. Also, investigating government lending can be useful in a post-COVID-19 economic environment.

KEYWORDS:

• Entrepreneurship
• competitiveness
• fiscal policy
• growth
• public debt
• EMU