A Regime-Based Effect of Fiscal Policy : Evidence from an Emerging Economy
In recent years, few authors have attempted to address the question of whether the state of the economy influences the impact of fiscal policy on the economy. Key findings have often indicated that expansionary fiscal intervention tends to be more...
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| Format: | Working Paper |
| Language: | English |
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World Bank, Washington, DC
2017
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| Online Access: | http://documents.worldbank.org/curated/en/892451511876756525/A-regime-based-effect-of-fiscal-policy-evidence-from-an-emerging-economy http://hdl.handle.net/10986/28919 |
| Summary: | In recent years, few authors have
attempted to address the question of whether the state of
the economy influences the impact of fiscal policy on the
economy. Key findings have often indicated that expansionary
fiscal intervention tends to be more effective when the
economy is in a downturn. This favorable impact is more
pronounced with an increase in government spending as
opposed to a tax reduction. Despite several empirical
attempts, the findings on the state-dependent nonlinear
relationship of fiscal policy and output growth are often
limited to developed economies. Building on the current
research trend of using the threshold vector autoregression
methodology, this paper bridges this gap and extends the
empirical body to estimate the nonlinear relationship for an
emerging economy, Tunisia. The paper provides empirical
evidence that fiscal policy has a different impact on
economic activity depending on the business cycle, the
instrument of the fiscal policy used, and the intensity of
the shock. The paper argues that in a downturn phase,
government spending should be privileged particularly in the
short run, with a gradual increase in the tax base to reduce
the risk of worsening the budget deficit. Further, the
monetary authority should be less inclined to raise its
policy rate in the early stage of the recessionary period,
as this intervention could have an adverse impact on
economic growth. In the expansion phase, a tax cut
intervention appears on the contrary to have a stronger
positive impact on economic activity, especially in the
short run, as the monetary authority is expected to
introduce gradual policy hikes more rapidly to control for
the inflationary expectations. |
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