Monetary versus Fiscal policy: which combination gives the highest growth performance?

This paper investigates a simultaneous impact of monetary and fiscal policies on economic growth in a single model. The data for 21 OECD countries covering the period 1970-2009 is gathered for our study of policy effect on economic growth. A quadratic specification method is employed by constructing a relationship between economic growth and several policy variables in order to find optimal values for government debt level, tax revenues and interest rate that lead to the highest economic growth, which is a contribution of this paper. Furthermore, a threshold method is exploited to determine the highest growth rate at different tax and interest rates given a particular debt level. Another distinctive feature of this research is uttered in simultaneous application of both a quadratic specification method and a threshold method in the same paper which has never been done before. Having analysed methodological problems of previous studies, we employ a state-of-art advanced estimation technique which ensures a robustness of stated conclusions. According to the results, the highest economic growth performance is achieved when total tax revenue reach 23.75% of GDP and when a government debt level does not exceed 41% of GDP