E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General OutlookReturn

The paper examines whether redistribution policy is bad or good for economic growth by analysing government expenditure on the welfare state in the old and new post-socialist EU countries from the mid-1990 to 2008. Due to the differences among countries fixed effect is included in the model using panel data. We find negative association between the mean values of expenditure on the welfare state in several time periods and the subsequent GDP growth rate for EU-25 and also for the subsets (EU-15 and EU-10) of the EU countries. When taking into account explicitly the government budget constraint and applying dynamics the same conclusion can be drawn for EU-25. Welfare state expenditure has statistically significant negative coefficient confirming the postulated hypothesis of a negative impact on the GDP growth rate.

Based on a general equilibrium model, this study finds that real output in Estonia is positively associated with real quantity of money and negatively influenced by real depreciation of the kroon, real stock prices, and the expected inflation rate. Government deficit spending is found to be insignificant. Policy implications are that fiscal discipline pursued by the Estonian government is appropriate, that a stronger currency may better serve Estonia, and that the wealth effect of an increase in the stock price on real money balances is greater than the substitution effect.

Extending Romer's IS-MP-IA model to include foreign trade and exchange rates and applying the GARCH method, the study came to the conclusion that real gross domestic product is negatively associated with the inflation rate, exchange rate depreciation, and the foreign interest rate and positively affected by government deficit spending and world output. Therefore, inflation targeting is an appropriate monetary policy, and the depreciation of the koruna would be harmful to the Czech economy even though it would help the export sector.