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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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 |
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okr-10986-289192021-06-08T14:42:47Z A Regime-Based Effect of Fiscal Policy : Evidence from an Emerging Economy Bouzid, Bechir N. FISCAL POLICY ECONOMIC CYCLE CYCLICALITY EMERGING ECONOMIES TVAR 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. 2017-12-01T17:45:31Z 2017-12-01T17:45:31Z 2017-11 Working Paper 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 English Policy Research Working Paper;No. 8258 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper Middle East and North Africa Tunisia |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
FISCAL POLICY ECONOMIC CYCLE CYCLICALITY EMERGING ECONOMIES TVAR |
| spellingShingle |
FISCAL POLICY ECONOMIC CYCLE CYCLICALITY EMERGING ECONOMIES TVAR Bouzid, Bechir N. A Regime-Based Effect of Fiscal Policy : Evidence from an Emerging Economy |
| geographic_facet |
Middle East and North Africa Tunisia |
| relation |
Policy Research Working Paper;No. 8258 |
| description |
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. |
| format |
Working Paper |
| author |
Bouzid, Bechir N. |
| author_facet |
Bouzid, Bechir N. |
| author_sort |
Bouzid, Bechir N. |
| title |
A Regime-Based Effect of Fiscal Policy : Evidence from an Emerging Economy |
| title_short |
A Regime-Based Effect of Fiscal Policy : Evidence from an Emerging Economy |
| title_full |
A Regime-Based Effect of Fiscal Policy : Evidence from an Emerging Economy |
| title_fullStr |
A Regime-Based Effect of Fiscal Policy : Evidence from an Emerging Economy |
| title_full_unstemmed |
A Regime-Based Effect of Fiscal Policy : Evidence from an Emerging Economy |
| title_sort |
regime-based effect of fiscal policy : evidence from an emerging economy |
| publisher |
World Bank, Washington, DC |
| publishDate |
2017 |
| url |
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 |
| _version_ |
1764468031411453952 |