The cyclicality of fiscal policy in South Asia

Abstract

The paper empirically analyses the role of macroeconomic, political and institutional variables in determining cyclical patterns of government revenues, expenditures and fiscal balance in South Asian Countries (SACs). Panel regression analysis is conducted for the period 1980 to 2013. The findings support existing literature about developing countries demonstrating that fiscal policies are strongly procyclical in SACs and there is significant evidence of persistence. Revenues have decreased and expenditures have increased with output cycle which has deteriorated the fiscal balance. This indicates that fiscal balance is procyclical with output cycle in SACs and this procyclicality increases during good times. The results suggest that SACs can conduct counter cyclical fiscal policies if they stabilize output, control inflation and structural shocks, have deep financial markets, high financial openness, have few veto players in the political procedures and have stronger institutions. These results are robust to alternative measures of output cycle and model specifications.

Fiscal policy and economic activity in South Asia

“…It remains unclear how they created their data set, and their study is limited to government consumption expenditure. Similarly, Zakaria and Junyang (2015) study the cyclical properties of fiscal policy in seven South Asian economies and explore possible factors explaining fiscal cyclicality. They find strong procyclicality of government expenditure and argue that limited access to domestic and international borrowing and a wider dispersion of political power are contributing to procyclicality.…”

“…Rather than looking at either a large sample of countries or only a single country, we study six South Asian countries that share important characteristics and exploit the panel dimension 3 . While there have been attempts to study fiscal policy in South Asia in a similar manner before, these analyses are either only partial or face methodological issues (Hayat & Qadeer, 2016; Hussain & Siddiqi, 2013; Zakaria & Junyang, 2015).…”

Fiscal Policy and Economic Activity in South Asia

“…While they find evidence that fiscal policy was procyclical during this period, they find no evidence that the strength or quality of political systems or institutions affected the procyclicality. Similarly, Zakaria and Junyang (2015) study the cyclical properties of fiscal policy in seven South Asian economies and explore possible factors explaining fiscal cyclicality. They find strong procyclicality of government expenditure and argue that limited access to domestic and international borrowing and a wider dispersion of political power are contributing to procyclicality.…”

“…Rather than looking at either a large sample of countries or a single country, we study six South Asian countries that share important characteristics and exploit the panel dimension. 3 While there have been attempts to study fiscal policy in South Asia in a similar manner before, these analyses are either only partial or face methodological issues (Hussain and Siddiqi 2013;Zakaria and Junyang 2015;Hayat and Qadeer 2016).…”