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Fiscal policy and economic activity in South Asia
Author(s) -
Beyer Robert C. M.,
Milivojevic Lazar
Publication year - 2021
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/rode.12710
Subject(s) - economics , government spending , fiscal policy , gross domestic product , government revenue , monetary economics , capital expenditure , real gross domestic product , tax revenue , liberian dollar , revenue , boom , business cycle , macroeconomics , public expenditure , public finance , finance , welfare , environmental engineering , market economy , engineering
This paper analyzes whether fiscal policy in South Asia amplifies or smoothens business cycle fluctuations. It estimates several econometric models to explore the cyclicality of government spending and tax buoyancy. In South Asia, tax revenue increases less than one to one with changes in gross domestic product (GDP), but public spending increases more than proportionally. For each percentage point change in GDP growth, government expenditure changes by 1.3 percentage points. While changes in tax revenue have no significant impact on economic activity, the government spending multiplier is positive and significant: each additional US dollar (USD) of spending leads to an immediate increase in GDP of 0.2 USD and to an increase of 0.4 USD in the medium run. The impact of public spending on economic activity is entirely due to capital expenditure, which is also more procyclical. Procyclical public spending and a positive expenditure multiplier imply that fiscal policy in South Asia amplifies boom‐and‐bust cycles. These results are in line with those of other emerging markets and developing economies and robust to different model specifications and estimation strategies.