Growth effects of fiscal policies: an application of robust modified M-estimator

In the field of economics only nonhigh-quality data is usually available, which can cause the widely used least square estimators (LSE) to be biased and inefficient. Therefore, the present study introduces the robust modified M-estimator (MME) proposed by Yohai et al. (1991 Yohai, VJ, Stahel, WA and Zamar, RH. 1991. A procedure for robust estimation and inference in linear regression in Directions in Robust Statistics – Part II, vol. 34, (Eds) W.A. Stahel and S. Weisberg, IMA Volumes in Mathematics and its Application, New York, 365–374[Crossref] , [Google Scholar]). In the case of growth regressions with fiscal variables it can be shown that LSE is biased and inefficient, whereas MME is not. The robust regressions ascertain a stable positive growth effect of public infrastructure and education. Moreover, this study shows that government size has not been detrimental to growth for OECD countries in the past. No growth effects of taxation have been found so that endogenous growth theory is not corroborated in this regard. Consequently, fiscal policies aiming at promoting growth should focus on infrastructure and education.