What is Efficiency Hypothesis

This chapter investigates the long-run effect of globalization on public finance using data of developing countries from 2005 to 2017. The present research makes a contribution to the literature from various aspects. Firstly, integration and cointegration properties of the variables are considered. Then, the cointegrating relationship between globalization and public finance indicators is estimated by employing the fully modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS) estimators. The empirical results are mixed. Globalization influences both government expenditure and public debt positively and significantly in the long run, while it influences tax revenue negatively. Moreover, the effect of globalization on the increased share of indirect taxes in the long run is more than the effect on the increased share of direct taxes.