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The Effects of Fiscal Policy on Private Business Investment - Essay Example

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The private investment is regarded as a fundamental aspect in promoting a broad based and well-sustained growth (Razin, Assaf, and Jacob, 2006). This is immensely…
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The Effects of Fiscal Policy on Private Business Investment
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The Effects of Fiscal Policy on Private Business Investment

Download file to see previous pages... As a point of departure, private business investments are considered as fundamental channels in which fiscal policy influences the economic growth. For instance, the endogenous economic growth model explains the dynamism in the capital stock, which is believed to influence the long-term per capita growth rate. This can happen through two ways namely more quantitative investment and more-efficient investments. This follows that the aspect of fiscal policy can be said to influence investments by varying domestic demand, which influence the Growth Development Product (GDP) of a nation, thus influencing the economy growth of a country. Considering a model of a tight fiscal policy where expenditure is reduced and increased taxation like in the case of the US, immense negative expectations are eminent. This reduces the viable incentives fro investments. On equal measure, the fiscal policy, particularly the short terms, can directly affect investment through the cost of capital attributed to the tax system (Razin, Assaf, and Jacob, 2006. This follows that, the long-term fiscal policy on well-designed tax system on liberalized and privatised programmes such as for the case of the US and UK, help private sector investments because of reduced direct government involvement.
For the case of government interest increase, foreign capital is attracted from the foreign investors and this increases the demand for the country’s currency. This implies that the value of country’s currency is increased. It is imperative to note that the increase in the currency value makes the exports from the country in question more expensive. On equal measure, when the government funds discrepancy with issuance of government bonds, the interests’ rates increases across the market due to the government borrowing which creates a higher demand for the credit in the financial markets. It is imperative to note that, theoretically, ...Download file to see next pagesRead More
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