Fiscal policies world activity map

One of the most controversial issues in the economics literature is whether the government should intervene in the economy or not. The main difference between the Classical view and the Keynesian view is their stance regarding these interventions (monetary and fiscal policies). The classical view argues that the state's economic policies should be limited to security, justice and diplomacy and that any other intervention would not have a positive reflection over the real economy. On the other hand, the Keynesian view, mainly considers these interventions as legitimate and necessary by fiscal policy in order to regulate the disruptions in the market and to meet the necessity for effective demand. Moreover, they do not see any negativity in creating financing by borrowing from domestic or foreign markets in order to realize these policies. While the Classical view is against borrowing, the Keynesian view argues that borrowing should be applied for the two reasons given above. Other schools within the literature are derivatives of these two analyses. The main purpose of this study is to analyze the effectiveness of fiscal policy in contemporary economies. In this context, while the Ricardian Equivalence Hypothesis advocated by the Classical view, and the Twin Deficit Hypothesis advocated by the Keynesian view, are discussed. In addition, the relationship between borrowing and economic growth is also examined. In this study, in which annual data from 90 countries around the world between 1995 and 2018 were used, the stationarity of the series was investigated by the ADF unit root test. Afterwards, the existence of a long-term relationship between the variables in the models was analyzed by the ARDL bounds test approach, and the long-term coefficient of the independent variable was estimated in the models. Acording to the findings, it was observed that the Ricardian Equivalence Hypothesis is valid in 24 countries and the Twin Deficit Hypothesis is valid for 16 countries. In examing the relationship between debt and economic growth, a positive relationship was found for 7 countries and a negative relationship for 22 countries. The number of countries in which all hypotheses were rejected was 38. In 6 countries, both the Ricardian Equivalence Hypothesis and the Twin Deficit Hypothesis were found to be valid. According to these results, considering the changing and developing economic conditions in the world, these two hypotheses are insufficient to explain the effectiveness of fiscal policy.