FISCAL DEFICITS AND ECONOMIC GROWTH IN PORTUGAL: A LONG-TERM PERSPECTIVE

A time series approach which includes unit root with structural breaks, cointegration, and Granger causality is applied to a long-run economic series for Portugal to study the long-term relationship between fiscal deficits and economic growth. Output and fiscal deficits, whether measured in amounts or as percentages of output, contain unit roots but are not cointegrated. Structural changes at various break dates do not affect their unit root process. Granger-causality analysis applied to the first difference of these variables yields results that are mixed Different time periods and different measures of fiscal deficits support different theoretical views. For the period up to 1926, the neoclassical view apparently holds: growth in deficits affects economic growth negatively. For the period after 1926, however, the Keynesian view is corroborated: growing government deficits have positive effects on economic growth. The data fail to support the Ricardian equivalence view for any time period using any of the two deficit measures.