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Spring 2013
ISSN 0890-913X
Volume 28, Number 2

Budget Deficits, Economic Freedom, and Economic Growth in OECD Nations: P2SLS Fixed-Effects Estimates, 2003–2008

Richard J. Cebula, Armstrong Atlantic State University
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TheJournalofPrivateEnterprise28(2),2013,7596BudgetDeficits,EconomicFreedom,andEconomicGrowthinOECDNations:P2SLSFixed-EffectsEstimates,20032008RichardCebulaJacksonvilleUniversityAbstractThisstudyempiricallyinvestigatestheimpactsofcentralgovernmentbudgetdeficitsandeconomicfreedomonpercapitarealeconomicgrowthinOECDnationsovertheperiod20032008.Economicgrowthismeasuredbythepercentagegrowthrateofpurchasing-power-parityadjustedrealpercapitaGDP.WithinthecontextoftheFixedEffectsModel,paneltwostageleastsquares(P2SLS)estimationsusingasix-yearpaneldatasetfor29ofthe30theOECDmembernationsasof2008asagrouprevealthateconomicgrowthisadecreasingfunctionofhighercentralgovernmentbudgetdeficitsandanincreasingfunctionofeconomicfreedom.Itissuggestedthatgovernmentscanbestpromoterealeconomicgrowthbylimitingthesizeoftheirbudgetdeficits(relativetoGDP)andpursuepoliciesconsistentwithincreasingvariousformsofeconomicfreedom.JELCodes:P10,P16,F43,H61Keywords:PercentagepercapitarealGDPgrowth;Governmentbudgetdeficits;EconomicfreedomI.IntroductionSincetheendoftheGreatRecession,economicgrowthintheUnitedStateshasbeenanemic,andtheunemploymentrateintheUnitedStateshasremainedstubbornlyhigh,theextraordinarypoliciesoftheFederalReserveinpurchasingmassivequantitiesoftoxicassetsandU.S.Treasuryissuesnotwithstanding.Asthisslowgrowth-highunemploymentscenariohasplayedout,twoveryinterestingcontroversieshavearisen.ThefirstinvolvesthemassivesizeofU.S.federalbudgetdeficits,whethermeasuredindollarterms,inflation-adjusteddollars,orasapercentageofGDP,andtheargumentthatsuchdeficitsarebothunsustainableandhavecontributedtothestubbornlypoorperformanceoftheU.S.economy(El-Shagi,2010;Gartner,Griesbach,andJung,2011).Thesecond75
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