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Effectiveness of countercyclical fiscal policy: Evidence from developing Asia

Author

Listed:
  • Jha, Shikha
  • Mallick, Sushanta K.
  • Park, Donghyun
  • Quising, Pilipinas F.

Abstract

Can discretionary fiscal policy effectively stimulate output? This paper examines this question in the context of developing Asia, where many countries implemented fiscal stimulus measures to support domestic demand during the global crisis. Economic conditions normalized after the crisis but growth in Asia has slowed down since. We examine historical data from 10 emerging Asian countries to assess whether countercyclical fiscal policy can support future growth in the region. Our examination is based on identifying shocks by restricting the contemporaneous relation between fiscal and non-fiscal variables. Our most significant and consistent finding is that in developing Asia, tax cuts have a greater countercyclical impact on output than government spending. This implies there is some scope for countercyclical tax adjustments so long as fiscal sustainability is not compromised.

Suggested Citation

  • Jha, Shikha & Mallick, Sushanta K. & Park, Donghyun & Quising, Pilipinas F., 2014. "Effectiveness of countercyclical fiscal policy: Evidence from developing Asia," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 82-98.
  • Handle: RePEc:eee:jmacro:v:40:y:2014:i:c:p:82-98
    DOI: 10.1016/j.jmacro.2014.02.006
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    Cited by:

    1. Şen, Hüseyin & Kaya, Ayşe, 2015. "Growth enhancing effect of discretionary fiscal policy shocks: Keynesian, Weak Keynesian or Non-Keynesian?," MPRA Paper 65976, University Library of Munich, Germany, revised 05 Aug 2015.
    2. Mencinger, Jernej & Aristovnik, Aleksander & Verbič, Miroslav, 2017. "Asymmetric effects of fiscal policy in EU and OECD countries," Economic Modelling, Elsevier, vol. 61(C), pages 448-461.
    3. Landon, Stuart & Smith, Constance, 2017. "Does the design of a fiscal rule matter for welfare?," Economic Modelling, Elsevier, vol. 63(C), pages 226-237.
    4. repec:eee:ecmode:v:65:y:2017:i:c:p:138-146 is not listed on IDEAS
    5. Castro, Vítor, 2017. "The impact of fiscal consolidations on the functional components of government expenditures," Economic Modelling, Elsevier, vol. 60(C), pages 138-150.
    6. repec:eee:ecmode:v:64:y:2017:i:c:p:270-287 is not listed on IDEAS
    7. Konstantin Makrelov & Channing Arndt & Rob Davies & Laurence Harris, 2018. "Fiscal multipliers in South Africa: The importance of financial sector dynamics," WIDER Working Paper Series 006, World Institute for Development Economic Research (UNU-WIDER).
    8. Murota, Ryu-ichiro & Ono, Yoshiyasu, 2015. "Fiscal policy under deflationary gap and long-run stagnation: Reinterpretation of Keynesian multipliers," Economic Modelling, Elsevier, vol. 51(C), pages 596-603.
    9. Houndonougbo, Ahiteme N. & Mohsin, Mohammed, 2016. "Macroeconomic effects of cost equivalent business fiscal incentives," Economic Modelling, Elsevier, vol. 56(C), pages 59-65.
    10. Cavallari, Lilia & Romano, Simone, 2017. "Fiscal policy in Europe: The importance of making it predictable," Economic Modelling, Elsevier, vol. 60(C), pages 81-97.
    11. Paret, Anne-Charlotte, 2017. "Debt sustainability in emerging market countries: Some policy guidelines from a fan-chart approach," Economic Modelling, Elsevier, vol. 63(C), pages 26-45.
    12. Choi, Yoonseok & Kim, Sunghyun, 2016. "Dynamic scoring of tax reforms in a small open economy model," Economic Modelling, Elsevier, vol. 58(C), pages 182-193.
    13. Şen, Hüseyin & Kaya, Ayşe, 2017. "How large are fiscal multipliers in Turkey?," EconStor Preprints 162763, ZBW - German National Library of Economics.
    14. Zhang, Lifeng & Ru, Yucong & Li, Jingkui, 2016. "Optimal tax structure and public expenditure composition in a simple model of endogenous growth," Economic Modelling, Elsevier, vol. 59(C), pages 352-360.
    15. repec:eee:ecmode:v:68:y:2018:i:c:p:372-387 is not listed on IDEAS
    16. repec:eee:ecmode:v:65:y:2017:i:c:p:51-66 is not listed on IDEAS
    17. Bhattarai, Keshab & Trzeciakiewicz, Dawid, 2017. "Macroeconomic impacts of fiscal policy shocks in the UK: A DSGE analysis," Economic Modelling, Elsevier, vol. 61(C), pages 321-338.
    18. repec:eme:jfeppp:jfep-07-2016-0051 is not listed on IDEAS
    19. repec:eee:ecmode:v:64:y:2017:i:c:p:473-486 is not listed on IDEAS

    More about this item

    Keywords

    Countercyclical fiscal policy; SVAR; Developing Asia; Structural shocks; Tax cuts; Government spending;

    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

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