FISCAL POLICY, INSTITUTIONAL CONSTRAINTS, AND ECONOMIC GROWTH ACROSS ECONOMIES

Abstract

This study investigates the relationship between fiscal policy, institutional frameworks, and economic growth acrossThis study investigates the relationship between fiscal policy, institutional frameworks, and economic growth across a broad set of economies, covering both advanced and emerging markets. Using global panel data, the analysis begins with fixed-effects regressions to capture baseline dynamics and then applies second-generation econometric models, cross-sectional dependence testing, slope homogeneity testing, and cross-sectionally augmented distributed lag (CS-ARDL) estimation. The analysis confirms strong cross-sectional dependence and slope heterogeneity across panel units, justifying the mean group estimator as the primary identification strategy. Fixed-effects estimates provide conditional support for a positive fiscal balance and investment effect on growth in institutionally disciplined environments. Complementary results from the cross-sectional augmented distributed lag model indicate that fiscal balances are determined primarily by gross domestic product, reflecting structural feedback and institutional constraints, rather than functioning as independent drivers of long-term growth. Overall, the findings emphasize the importance of institutional settings in conditioning the effectiveness of fiscal policy and in determining its contribution to stable economic outcomes, with important implications for fiscal rule design in emerging market contexts.