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Effectiveness of Countercyclical Fiscal Policy: Time-Series Evidence from Developing Asia

Author

Listed:
  • Jha, Shikha

    (Asian Development Bank)

  • Mallick, Sushanta

    (Asian Development Bank)

  • Park, Donghyun

    (Asian Development Bank)

  • Quising, Pilipinas

    (Asian Development Bank)

Abstract

As 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.

Suggested Citation

  • Jha, Shikha & Mallick, Sushanta & Park, Donghyun & Quising, Pilipinas, 2010. "Effectiveness of Countercyclical Fiscal Policy: Time-Series Evidence from Developing Asia," ADB Economics Working Paper Series 211, Asian Development Bank.
  • Handle: RePEc:ris:adbewp:0211
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    References listed on IDEAS

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    1. Pablo Burriel & Francisco de Castro & Daniel Garrote & Esther Gordo & Joan Paredes & Javier J. Pérez, 2010. "Fiscal Policy Shocks in the Euro Area and the US: An Empirical Assessment," Fiscal Studies, Institute for Fiscal Studies, vol. 31(2), pages 251-285, June.
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    Cited by:

    1. Haryo Kuncoro, 2014. "The cyclicality of government expenditure in developing country: the case of Indonesia," Economic Journal of Emerging Markets, Universitas Islam Indonesia, Department of Economics, vol. 6(1), pages 23-37, April.
    2. Wong, Chi Shing, 2012. "A Quantitative Study of Hong Kong's Fiscal Policy," MPRA Paper 41431, University Library of Munich, Germany.
    3. 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.
    4. Haryo Kuncoro, 2018. "A feasibility study of establishing fiscal council in Indonesia," Economic Journal of Emerging Markets, Universitas Islam Indonesia, Department of Economics, vol. 10(2), pages 137-147, Oktober.

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    More about this item

    Keywords

    Fiscal policy shocks; tax cuts; government expenditure; business cycles; economic growth; Asia;
    All these keywords.

    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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