Demographic pressures - these can affect the fiscal position too, for example an ageing population will cause an increase in government spending on the state pension; a fast-growing population (perhaps boosted by net inward migration) will also put more pressure on the government to fund essential public and merit goods. First, the fiscal policy presents the crowding-in effects in emerging market economies in the period of 2002-2014. 92 No. However, researchers and authorizers have to careful consider the assumptions in economic theories of fiscal policy’s effectiveness as Ricardian and non-Ricardian economic existences, liquidity-constraints, and the endogenization of labor supply and capital accumulation. First, this study has contribution to the literature of fiscal policy effectiveness and fiscal indebtedness by adding the effects of government expenditures under the external debt level and the associations with institutional quality. Ahmed, H. and Miller, S.M. 123-151, available at:, Buiter, W.H. However, expansionary fiscal policy also tends to affect interest rates and investment, exchange rates and the trade balance, and the inflation rate in undesirable ways, limiting the long-term effectiveness of persistent fiscal stimulus. In contrast, these effects may not exist or less significance in the case of low indebted countries. Time lags. A case study of Japan, Fiscal policy and private investment in Greece, Stabilization programs in developing countries: a formal framework, Fiscal deficits, financial fragility, and the effectiveness of government policies, Economic growth in Asia: determinants and prospects, Fiscal policy and politics: theory and evidence from Greece 1960-1997, Are bond-financed deficits inflationary? Literature available on monetary policy effectiveness still lacks synchrony. Masson, P.R., Bayoumi, T. and Samiei, H. (1995), “Saving behavior in industrial and developing countries”, Staff Studies for the World Economic Outlook, IMF working papers, Washington, DC, pp. This notable finding has very useful contributions to literature and implications for the practice in the case of emerging market economies. 24 No. The results are consistent with literature and many previous empirical results. This view is also called as the crowding-in effects of fiscal policy, where the government should undertake the expenditure in the recession time to cover the lack of private consumption and investment (Jahan et al., 2014). The empirical literature on the effects of fiscal policy on Pakistan's economic growth is still at its infancy, we surmise. Fiscal and monetary policy changes can affect businesses directly and indirectly, although competitive factors and management execution are also important factors. In particular, the government expenditure has non-Keynesian effects under the demand-enhancing effects if the existence of liquidity-constrained households when banks’ attitude toward lending is tight and the fiscal condition is bad. The impact of fiscal policy on economic growth can also be demonstrated and explored through transmission Time lags. With this beginning of basic model, we incorporate government expenditure to examine the impacts of fiscal policy on economic growth for 20 emerging market economies in the period 2002-2014, and follows the empirical model in Miller and Russek (1997): All the definitions and sources of variables are presented in detail in Table I. Published by Emerald Publishing Limited. The data description is presented in Table II. 50-66., Published in the Journal of Asian Business and Economic Studies. The monetarists regard monetary policy more effective than fiscal policy for eco­nomic stabilisation. This fact suggests that we should consider the non-linear relationship between fiscal policy and economic growth in the emerging market economies. In the literature of fiscal policy effectiveness, it is natural place to start with the Keynesian theory. Lockwood et al. 36 No. The full terms of this licence may be seen at Next section presents the methodology and data. Roodman, D. (2009), “How to do xtabond2: an introduction to difference and system GMM in stata”, The Stata Journal, Vol. 36, pp. (2016), “Fiscal deficits, financial fragility, and the effectiveness of government policies”, Journal of Monetary Economics, Vol. THE EFFECTIVENESS OF VARIOUS FISCAL MEASURES TO STIMULATE THE ECONOMY In the debate on the fi scal policy response to the economic downturn, the effectiveness of fi scal stimulus measures and the appropriate composition of fi scal stimulus packages to increase aggregate demand and stabilise the economy has recently gained importance. 7, pp. In addition, Wang et al. This box reviews a number of broad fi ndings … The field of the effectiveness of fiscal policy has re-highlighted in light of the 2008 global financial crisis with the new contemporary drivers such as external debt (Ruščáková and Semančíková, 2016). 2, pp. A case study of Japan”, Japan and the World Economy, Vol. Fiscal policy can have important effects on the supply-side of developed and developing countries. Cohen, K.J., Hawawini, G.A., Maier, S.F., Schwartz, R.A. and Whitcomb, D.K. The fiscal policy variables considered in the study include government gross fixed capital formation, tax expenditure and government consumption expenditure as well as budget deficit. effectiveness of monetary and fiscal policy over the period of financial crisis. Journal of Asian Business and Economic Studies. Nelson and Singh (1998), for instance, argue that a democratic political system permits active in a voluntary way, at the same time it creates competitive market forces conditions for economic growth. and Kojo, N.C. (2004), “Growth, governance, and fiscal policy transmission channels in low-income countries”, European Journal of Political Economy, Vol. 321-338. Then, the institutional factors including government effectiveness, regulatory quality, and control of corruption are incorporated, respectively, to test the impacts of institutions on economic growth. And the permanent fiscal changes can lead to the crowding-out effects since private sectors expect the persistent changes in interest rates and exchange rates in this case (see Buiter, 1977; Arestis, 1979; Mundell, 1963; Fleming, 1962). 571-597, available at:, Afonso, A. and Strauch, R. (2007), “Fiscal policy events and interest rate swap spreads: evidence from the EU”, Journal of International Financial Markets, Institutions and Money, Vol. (2002), the debt accumulation may be used as a strategic instrument to limit the fiscal capacity for future government, while the availability and cost of domestic and external borrowings are often major tackles on fiscal policy in developing countries. Cart . Fiscal policy refers to the government's use of revenue generation and spending strategies to control public revenue and expenditure, and ultimately influence the national economy. This result suggests that Vietnam should consider the fiscal policy as an effective policy in tackling the downturn of the economic growth. Thus, our result supports for the Keynesian views of fiscal policy that the fiscal policy is needed to promote the economic growth in the emerging market economies since the sources for the growth from the private sectors are still limited at there and the roles of governments in creating the basic start for the development of other sectors. Adam, C.S. Effectiveness of Monetary Policy: The government influences investment, employment, output and income through monetary policy. WP/02/208, IMF, Washington, DC, Crowding out and crowding in of private donations and government grants, Information quality and market efficiency, Journal of Financial and Quantitative Analysis, Effect of country governance on bank privatization performance, International Review of Economics & Finance, Budget deficits, government debt, and long-term interest rates in Japan, Journal of the Japanese and International Economies, What causes changes in the effects of fiscal policy? Therefore, the rightful choice in this situation is institutional improvement and revolution. All above economic views require assumptions to be presence such as no liquidity constraints, perfect financial markets in Ricardian equivalence. 20 No. However, these assumptions are usually un-existed thus the significance of theories is questioned in both theory and practice (Haque and Montiel, 1989). (2007) notice that the elimination of corruption is not usually an economic objective for the development, but the frustration with the lack of effectiveness of traditional economic theories and the recognition of the important roles of institutions and good governance practices have led the more attention to the corruption. 201-218. This is easy to understand that the higher economic growth rate provides more sources such as capital and incentives for economic activities. 1, pp. Meanwhile, the low indebted countries have higher fiscal room for future government in implementing fiscal policy, which may undertake with the favorable terms of debt-financing, and that in turn promotes the crowding-in effects. The effectiveness of discretionary fiscal policy depends on many factors. and Singh, R.D. 1, pp. They also note that the incomplete markets and sovereign default risk premium have important roles in explaining the pro-cyclicality of public expenditures and tax rates in these economies. That is, there are factors that increase or decrease the efficacy of fiscal policy. Haque, N.U. Easterly, W., Rodriguez, C.A. 44 No. For instance, Haque and Montiel (1989) find that the Ricardian equivalence is not supported in the developing countries due to liquidity constraints. According to the review of Hemming et al. 44 No. 17 No. Martinez-Vazquez et al. Heutel, G. (2014), “Crowding out and crowding in of private donations and government grants”, Public Finance Review, Vol. O 475-485. Bertola, G. and Drazen, A. Central banks indirectly target activity by influencing the money supply through adjustments to interest rates, bank reserve requirements, and the purchase and sale of government securities and foreign exchange. Thomas, M.A. 6, pp. In addition, the results in Table VIII provide us additional interesting facts. It depends on the state of the economy. There are many reasons as to why the fiscal policy may not be as effective as desired, or sometimes even be counterproductive. and Tagkalakis, A.O. 3-18. To address this question, I examine mytutor2u mytutor2u. The fiscal policy is considered with a wide range of literature, while the effectiveness of fiscal policy is seen under its’ impacts on the economic growth and the long-term sustainable development. Mundell, R.A. (1963), “Capital mobility and stabilization policy under fixed and flexible exchange rates”, Canadian Journal of Economics and Political Science/Revue canadienne de economiques Et Science Politique, Vol. However, the implementation lag in fiscal policy is likely to be more pronounced, while the impact lag is likely to be less pronounced. Meanwhile, other features of the economy should be considered in study the effectiveness of fiscal policy such as the institutional framework and the debt burden. Sutherland, A. Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. Evidence From A Factor-Augmented Panel Prepared by Salvatore Dell’Erba and Sergio Sola Authorized for distribution by Bernardin Akitoby JuO\ 2013 Abstract This paper reconsiders the effects of fiscal policy on long-term interest rates employing a Factor Augmented Panel) (FAP to control for the presence of common unobservable factors. 82 No. Through GMM estimators for panel data, the study presents some meaningful findings. The turn in economics: neoclassical dominance to mainstream pluralism? They note the highest GDP multipliers for government consumption and investment in the short-run, whereas capital income tax and public investment have long-run crowding-out effect on GDP. This brings forward adjustments in economic factors that occur more progressively so that fiscal policy matters in not only long-term but also short-term period. (2014), “Public debt and economic growth in India: a reassessment”, Economic Analysis and Policy, Vol. For instance, if government is restricted by the fiscal rules to balance the fiscal budget in the long run, thus individuals may partial adjust their behaviors if they have short-term horizon which presents the presence of both Ricardian and neo-classical views. Applying the endogenous growth model with the common elements of economic growth including labor, capital, technology, credit, trade openness, and capital flow, we then incorporate the government expenditure to investigate the effective of fiscal policy. Kameda, K. (2014a), “Budget deficits, government debt, and long-term interest rates in Japan”, Journal of the Japanese and International Economies, Vol. In fact, many researchers try to find evidences with the parallel existence of both and mixed conclusions (see Ahmed and Miller, 2000; Heutel, 2014; Şen and Kaya, 2014). fiscal policy: Government policy that attempts to influence the direction of the economy through changes in government spending or taxes. If the multiplier effect is large, then changes in government spending will have a bigger effect on overall demand. The factor that has the greatest influence on the effectiveness of fiscal policy is the marginal propensity to consume - the tendency of people to increase their spending when their incomes rise. {�jɤn�?�ȬO�le��v����.�)�{. After that, we divide our data into two sub-samples (the low indebted countries and high indebted countries) to investigate the effectiveness of fiscal policy under two regimes. 6, pp. and Russek, F.S. 1, pp. Section 1 states our motivations of this study. In addition, the governments in emerging market economies are almost under the expansionary phrases since their general government consumption growth rates are positive, but it may diversify among countries due to the high standard deviation. Basing on the results of these estimations, we then divide sample into two sub-samples basing on the level of external debt to GNI (see Table II). 2, pp. 53-70. However, the impact of fiscal policy … 52 No. A Ricardian analysis”, Journal of political economy, Vol. (2016) find that the improvement in country governance just enhances the effectiveness of banks and then promote the economic growth in developing countries, while it reduces these effects in developed countries due to smaller spaces for improvement. Kirchner, M. and Wijnbergen, S.V. The significant positive impact of lag economic growth to itself shows that the higher economic growth in current year creates better conditions for growth in next year. Review what fiscal policy is and how the two key components of fiscal policy can be used to influence unemployment. 124-133. While expansionary and contractionary fiscal policy both directly affect the national income, the ultimate change in output is not always equal to the policy change. 53-54. 9 No. 3, pp. Fiscal policy, measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expenditures. 1-10. Fleming, J.M. 1, pp. Bhattarai, K. and Trzeciakiewicz, D. (2017), “Macroeconomic impacts of fiscal policy shocks in the UK: a DSGE analysis”, Economic Modelling, Vol. 13 No. However, some of extensions in the line of Keynesian model allow for crowding-out effects of fiscal policy, which means the expansion of government expenditure crowds out the private demand and then influences negatively on output, through the changes in interest rates and exchange rate in the case of open economy. The satisfaction of hygiene needs can prevent dissatisfaction and poor performance, but only the satisfaction of the factors of motivation will bring the type of improvement in productivity sought by companies ( Herzberg, 1993 ). However, the economic development in emerging market economies, which is a new definition of the development level of economies and nearly relating to the developing countries definition, boosts their roles in the world economy. 83 No. (1981), “Stabilization programs in developing countries: a formal framework”, Staff Papers, Vol. Bhattarai and Trzeciakiewicz (2017) use a DSGE analysis to examine the fiscal policy in UK. 16 No. This helps us consider the constraints of external debt of ability of private sector in accessing international financial markets. For example, Cuadra et al. In contrast, the individuals in low indebted countries may less sensitive to the government expenditures, especially through the debt-financing spending, since the interest rates are less responsive and they are easier to access the financial markets, thus the fiscal policy is argued with the existence of crowding-in effects. In addition, the public sectors still strongly present in emerging market economies through the state-owned enterprises so that the fiscal policy has significant impacts on the whole economy through its effects on public sectors. However, the literature of fiscal policy is lacking of the studies about the effectiveness of fiscal policy under the contributions from the institutions and external debts in a comprehensive work. (1983), “Friction in the trading process and the estimation of systematic risk”, Journal of Financial Economics, Vol. See Hemming et al. Fiscal can also have issues with time lags. Although monetary policy is not very effective in a recession, it is flexible and works well to slow down the economy. 37-54. In which, the neo-classical economics raise the rational expectations in comparing to the adaptive expectations in Keynesian economics. Hygiene factors include company policy, supervision, work conditions, salary, security, relationship with the boss, and relationships with peers. Effectiveness of Monetary Policy 2. Fiscal policy lags are the result of delays in recognizing problems with the economy and applying solutions. Thus, Ricardian view suggests neither crowding-in nor crowding-out effects of fiscal policy (Arestis, 2011; Şen and Kaya, 2014). To see how fiscal policy can affect the economy, consider a fiscal expansion that leads to rising demand, which, in turn, increases production. (2010) note that emerging market economies typically exhibit a pro-cyclical fiscal policy, where governments increase (decrease) expenditures in economic expansions (recessions) and rise (reduce) tax rates in bad (good) times. (2000). and Rath, B.N. According to Kirchner and Wijnbergen (2016), if banks hold substantially sovereign debt the effectiveness of expansionary fiscal is impaired since deficit-financed fiscal expansions reduce private access to credit in this case. (1991), “Dynamic responses to policy and exogenous shocks in an empirical developing country model with rational expectations”, Economic Modelling, Vol. They also find evidence that the deficits in line with high debt stocks exacerbates the adverse consequences of high deficits. Notably, the improvement in institutions promotes higher crowding-in effects of fiscal policy. (1994) document evidences that fiscal policy has crowding-out effects on private investment through the impacts on interest rates in developing countries. Furthermore, there are some cases that the effectiveness of fiscal policy is explained by all of these views. Recently, Afonso and Strauch (2007) find that the European fiscal policy makes market swap spreads response in mostly around five basis points or less in 2002. 921-943, available at:–4266(99)00112–0. However, the literature needs the explanations for the mechanism and empirical evidences. Whereas, the government has to implement fiscal consolidation for the long-term sustainability of the economy. As a very gross simplification, monetarists believe monetary policy is inherently effective and its role is to allow markets to be as free as possible. The significant positive coefficient of external debt level and significant negative coefficient of square of external debt level suggest that the external debt and economic growth has a non-linear relationship. WP/02/208, IMF, Washington, DC. Section 2 briefly presents literature reviews and then our arguments on the effectiveness of fiscal policy under the contributions from institutions and external debt. Thus, an emerging market economy with highly level of debts will determine the size of fiscal deficit in facing with more difficulties in assessing to international capital market (inaccessible or accessible with unfavorable terms), which then leads to the stronger crowding-out effects. In next step, we also incorporate institutional factors into the model to investigate the effects of institutional quality on economic growth following the empirical model suggesting in Lee and Hong (2012). (1981), “The economics of organization: the transaction cost approach”, American Journal of Sociology, Vol. 1, pp. and Sapriza, H. (2010), “Fiscal policy and default risk in emerging markets”, Review of Economic Dynamics, Vol. 2, pp. (2005), “Fiscal deficits and growth in developing countries”, Journal of Public Economics, Vol. Supply by the acronym PESTEC it is also noticed that they have high growth rate of investment in Turkey that... At http: // factors affecting effectiveness of fiscal policy Kasselaki, M.T the study of Aidt et al Keynesian.... Result in the period of 2002-2014 recognizing problems with the characteristic of counter-cyclical default risk in their business cycle on. Supply of work effort literature on the effectiveness of monetary and fiscal policy ” can result in the from... Bigger effect on key macroeconomic indicators such as it depends on the other hand, has argued fiscal... 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