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Fiscal Policy in the BRICs

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  • Fredj Jawadi

    ()
    (University of Evry Val d?Essone & Amiens School of Management)

  • Sushanta K. Mallick

    ()
    (Queen Mary University of London)

  • Ricardo M. Sousa

    ()
    (Universidade do Minho - NIPE)

Abstract

This paper assesses the macroeconomic impact of fiscal policy shocks for four key emerging market economies - Brazil, Russia, India and China (BRICs) – using a Bayesian Structural Vector Auto-Regressive (BSVAR) approach, a Sign-Restrictions Vector Auto-Regressive framework and a Panel Vector Auto-Regressive (PVAR) model. To get a deeper understanding of the government’s behaviour, we also estimate fiscal policy rules using a Fully Simultaneous System of Equations and analyze the importance of nonlinearity using a smooth transition (STAR) model. Drawing on quarterly frequency data, we find that government spending shocks have strong Keynesian effects for this group of countries while, in the case of government revenue shocks, a tax hike is harmful for output. This suggests that there is no evidence in favour of ‘expansionary fiscal contraction’ in the context of emerging economies where spending policies are largely pro-cyclical. Our findings also show that considerations about growth (in the case of China), exchange rate and inflation (for Brazil and Russia) and commodity prices (in India) drive the nonlinear response of fiscal policy to the dynamics of the economy. All in all, our results are consistent with the idea that fiscal policy can be a powerful stabilization tool and can provide an important short-term economic boost for emerging markets, in particular, in the context of severe downturns as in most recent financial turmoil.

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Bibliographic Info

Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 19/2011.

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Date of creation: 2011
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Handle: RePEc:nip:nipewp:19/2011

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Keywords: fiscal policy; emerging markets; fully simultaneous system of equations; sign-restrictions VAR; smooth transition regression model;

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Cited by:
  1. Tang, Hsiao Chink & Liu, Philip & Cheung, Eddie C., 2010. "Changing Impact of Fiscal Policy on Selected ASEAN Countries," Working Papers on Regional Economic Integration 70, Asian Development Bank.
  2. Luca Agnello & Gilles Dufrénot & Ricardo M. Sousa, 2012. "Adjusting the U.S. Fiscal Policy for Asset Prices: Evidence from a TVP-MS Framework," NIPE Working Papers 20/2012, NIPE - Universidade do Minho.

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