Budget Deficits, Economic Freedom, and Economic Growth in OECD Nations: P2SLS Fixed-Effects Estimates, 2003-2008

This study empirically investigates the impacts of central government budget deficits and economic freedom on per capita real economic growth in OECD nations over the period 2003-2008. Economic growth is measured by the percentage growth rate of purchasing-power-parity adjusted real per capita GDP. Within the context of the Fixed Effects Model, panel two stage least squares (P2SLS) estimations using a six-year panel data set for 29 of the 30 the OECD member nations as of 2008 as a group reveal that economic growth is a decreasing function of higher central government budget deficits and an increasing function of economic freedom. It is suggested that governments can best promote real economic growth by limiting the size of their budget deficits (relative to GDP) and pursue policies consistent with increasing various forms of economic freedom.