Challenges for the EU New Member States
Edited by Massimo Florio
Chapter 2: Recent Advances in Public Investment, Fiscal Policy and Growth
Chiara Del Bo* INTRODUCTION Economic growth is one of the most extensively studied topics in economics and one of the key questions researchers are seeking to answer is ‘what is the main determinant of sustained economic growth?’. Different answers have emerged during time and the quest for the ultimate driver is still ongoing. Several factors, including human and physical capital accumulation, institutions and public policies have been singled out in the theoretical and empirical literature as the main forces allowing economies to enjoy long-run growth. The question we are addressing in this review is to what extent public investment, public capital and fiscal policy affect growth, and through which channels this impact is working. The literature on these subjects is vast and growing at a steady rate, forcing us to select contributions that we deemed essential to the understanding of the issue. The focus is mainly on empirical contributions, though important theoretical models, with clear and well-defined policy implications, are also considered. The issues surveyed in the following sections are especially relevant in countries belonging to the European Union (EU), both because of the existence of the Stability and Growth Pact (SGP) and Maastricht criteria, which set enforceable fiscal targets and rules, and because of the recent and ongoing process of enlargement. The New EU Member States (NMS) are likely to suffer, with respect to Old Member States, from infrastructure gaps in terms of quantity and quality, warranting a need for significant investment, and are characterized by different levels...
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