Demand – supply – taxation in times of crisis

  • Delia Elena DIACONASU Alexandru Ioan Cuza University of Iasi
  • Ion POHOATA Alexandru Ioan Cuza University of Iasi
  • Oana Ramona SOCOLIUC Alexandru Ioan Cuza University of Iasi
Keywords: Fiscal policy, Consumption, Investment, Vector Error Correction, Crisis

Abstract

The confrontation of the two doctrines, the Keynesianism and the Supply-side economics highlight that the Laffer perspective is the way to achieve solid economic growth on the long way and aims the core of an “exit from crisis” policy. Therefore, this article aims to analyze the hypothesis that a high level of taxation and public spending deters productive behavior and reduces economic growth during recessions. In other words, an easy taxation and low unproductive public spending are desirable for both, the enterprising investor and the consumer. Using the example of Romanian fiscal policy, on one side, we validated within a Vector Error Correction framework that an increase in government revenues harms consumption, investment and the level of employment, in conjunction with a procyclical behavior of fiscal authorities. On the other side, our results showed some positive effects of an increased government expenditures on consumption and employment, which can be explained by the accelerate deterioration of primary balance deficit and the Central Bank’s low interest rate. Moreover, even though the initial positive response of investment to a government spending shock is positive, this is ephemeral and nonsignificant. Our findings highlight that, in order to reach growth on the long-run in times of crisis, the Romanian economy should adopt the fiscal policy and measures suggested by the Supply-side Economics.

Author Biographies

Delia Elena DIACONASU, Alexandru Ioan Cuza University of Iasi

Faculty of Economics and Business Administration

Department of Research

Researcher PhD

Ion POHOATA, Alexandru Ioan Cuza University of Iasi

Faculty of Economics and Business Administration

Department of Economics and International Relations

Professor PhD

Oana Ramona SOCOLIUC, Alexandru Ioan Cuza University of Iasi

Faculty of Economics and Business Administration

Department of Economics and International Relations

Lecturer PhD

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Published
2018-01-23
How to Cite
DIACONASU, D., POHOATA, I., & SOCOLIUC, O. (2018). Demand – supply – taxation in times of crisis. Timisoara Journal of Economics and Business, 10(1), 88-103. https://doi.org/https://doi.org/10.1515/tjeb-2017-0006
Section
Articles