Effectiveness of Countercyclical Fiscal Policy: Time-Series Evidence from Developing Asia
AbstractAs the global crisis hit developing Asia, several countries instituted fiscal stimulus measures to create domestic demand. With the region returning to normal times, in this paper we draw lessons using historical data from 10 developing Asian countries to examine if countercyclical fiscal policy can still be used to stimulate growth. To do so, we use a sign-restrictions-based structural vector autoregression model. We find that expansionary expenditure shocks have an insignificant effect on output but contractionary revenue shocks have a negative effect. On the basis of those estimated effects, we perform and compare two policy experiments: deficit-financed tax cuts and deficit spending. The experiment results indicate that while deficit-financed tax cuts stimulate economic activity, the impact of deficit spending is ambiguous. Our overall evidence thus suggests that tax cuts may be a more effective countercyclical policy instrument than government spending. However, a number of factors suggest that Asian governments should be cautious about actively using tax cuts for countercyclical purposes, in part because a big part of the revenue shocks in developing Asia are cyclical rather than discretionary.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Asian Development Bank in its series ADB Economics Working Paper Series with number 211.
Length: 34 pages
Date of creation: Aug 2010
Date of revision:
Fiscal policy shocks; tax cuts; government expenditure; business cycles; economic growth; Asia;
Find related papers by JEL classification:
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Wong, Chi Shing, 2012. "A Quantitative Study of Hong Kong's Fiscal Policy," MPRA Paper 41431, University Library of Munich, Germany.
- 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.
- Tang, Hsiao Chink & Liu, Philip & Cheung, Eddie C., 2013. "Changing impact of fiscal policy on selected ASEAN countries," Journal of Asian Economics, Elsevier, vol. 24(C), pages 103-116.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maria Guia S. de Guzman).
If references are entirely missing, you can add them using this form.