Fiscal Policy and Economic Activity in South Asia

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

South Asia Economic Focus, Spring 2020 : The Cursed Blessing of Public Banks

“…The cyclicality of government expenditure and tax revenue can be estimated in a straightforward way. Beyer and Milivojevic (2019) estimate a panel error correction model to understand the extent of procyclicality in South Asia and find that both revenues and expenditures are highly procyclical. The model is of the following form:…”

“…The estimation period is from 1990 to 2018. Sources: As explained in Beyer and Milivojevic (2019), World Bank, and staff calculations.…”

“…In South Asia, tax revenue increases less with GDP than public spending does. The table presents the results of updating the estimations of Beyer and Milivojevic (2019) to 2018. The coefficient of interest, θ, is highly significant.…”

“…The effect has been reinforced by the expenditure cuts targeting investment. In South Asia, capital expenditure -which is easier to reduce politically than current spending -has been more procyclical and has had a larger impact on GDP (Beyer and Milivojevic 2019). Procyclical fiscal policy is common among emerging markets and developing economies (Ilzetzki andVégh 2008, Frankel et al 2013) and arguably a reflection of an inability to access external finance timely as well as of weak institutions unable to contain overspending when growth is high.…”

“…Out-of-sample forecast based on estimation above and forecasts presented inFigure 2.1. Sources: As explained inBeyer and Milivojevic (2019), World Bank, and staff calculations.…”