The Impact of Fiscal Policy on Economic Activity over the Business Cycle: An Empirical Investigation in the Case of Algeria
-
Abderrahim Chibi
,
Sidi Mohamed Chekouri
Abstract
In this paper, we aim to analyze whether the effect of fiscal policy on economic growth in Algeria differs throughout the business cycle. To tackle this question, we use a Markov Switching Vector Autoregressive (MSVAR) framework. We find evidence of asymmetric effects of fiscal policy through regimes, defined by the state of the business cycle (recession and boom). The results show small positive government spending and revenue multipliers in the short term in both regimes. Most importantly, fiscal policy shocks have a stronger impact in times of economic recession than in times of expansion, which confirm the hypothesis of asymmetric effects. However, the impact of government spending is stronger than the impact of public revenue during recession periods. In addition, fiscal policy decision-makers interact with Anti-Keynesian view (pro-cyclical). Our results imply that there is something to gain by using the "right instrument" at the "right time".
Acknowledgments
The authors thank Benamer Abdelhak, Kamech Mohamed, Erhmann, Hans-Martin Krolzig and Benoit Bellone for sharing their data and computer codes. The authors also thank the reviewers for their generous comments and suggestions which helped improve the manuscript.
Appendix
A What Is the Fiscal Multiplier? (Spilimbergo, Symansky, and Schindler 2009)
The fiscal multiplier is the ratio of a change in output (ΔY) to an exogenous change in the fiscal deficit (ΔG is used here as a shortcut, it could be also →ΔT) with respect to their respective baselines (often potential output and structural deficit, respectively, even though authors use variations of these concepts). Depending on the time frame considered (usually a quarter or a year), different multipliers are used:
The impact multiplier:
The multiplier at some horizon N:
The peak multiplier, defined as the largest
The cumulative multiplier, defined as the cumulative change in output over the cumulative change in fiscal expenditure at some horizon N
The cumulative multiplier, which is often the most appropriate measure, is typically larger than the impact or peak multipliers, but is rarely reported. Unless specified differently, this note refers to the impact or the peak multiplier, but its implications are broader.
B Cubic Spline Interpolation Method (Rashid and Jehan 2013)
Reviewing the existing literature, we find different main strands of time-series econometric techniques for disaggregating observed low-frequency time-series data into higher-frequency data, such as the Denton’s (1970) approach, the Chow-Lin’s (1971) procedures, and the cubic spline interpolation process. The idea of cubic spline interpolation was primarily based on the engineer’s tool that is used to draw a smooth curve, passing through a number of different points of the data. In spline interpolation process, the estimated coefficients on the cubic polynomial are used as weights for each internal. Specifically, the piecewise function S (y) to make n equally spaced internals of the data is expressed as follows:
To define S ( ) splines, we need a total of 4n parameters to be estimated, as there are n evenly spaced intervals and four coefficients are required for each interval. These coefficients twist the curve so that it must pass through each of the observations without any interruption. This implies that the curve does not show any breaks in continuity. Specifically, Si ( ) is a third degree polynomial function and defined by
Furthermore, two conditions are imposed for each internal in order to get the cubic polynomial interpolation, which must match the values of the low-frequency series at both ends of the interval. These conditions are as follows:
where xi can be obtained from eq. (9). These conditions produce a piecewise continuous function, implying that each of sub-functions must joint at the data points at both ends of the interval. For making the curve seamless and smooth across the interval points, we are further required to impose the assumption of the continuity of the first and second derivatives:
The conditions of the first and second derivatives to be continuous result in the smooth unbroken curve over the intervals, passing through each of the data points over the sample period without exhibiting any erratic behavior.
Algeria: changes in nominal government expenditure and hydrocarbon GDP, 1968–2003.
Source: IMF Country Report No: 05/50. (2005, 6).
Algeria: Procyclicality of fiscal policy.
Unit root test (augmented Dickey–Fuller test).
| Level | First difference | |
|---|---|---|
| T | 1.479574 | −6.425538 |
| G | 3.861851 | −4.411451 |
| GDP | 2.827667 | −5.299093 |
Structure of revenue and public expenditure in Algeria, 2000–2016: (% of GDP).
| Expenditure | Revenue | |||
|---|---|---|---|---|
| Hydrocarbon | Nonhydrocarbon | Current | Capital | |
| 2000 | 29.6 | 8.9 | 20.9 | 7.9 |
| 2001 | 23.6 | 10.9 | 22.7 | 8.4 |
| 2002 | 22.2 | 13.4 | 24.6 | 10.2 |
| 2003 | 25.6 | 11.3 | 21.3 | 10.8 |
| 2004 | 25.6 | 10.5 | 20.3 | 10.5 |
| 2005 | 31.3 | 9.7 | 16.5 | 10.8 |
| 2006 | 32.8 | 9.9 | 16.8 | 12 |
| 2007 | 30.1 | 9.6 | 18 | 15.5 |
| 2008 | 37.2 | 10 | 20.2 | 17.9 |
| 2009 | 24 | 12.6 | 22.5 | 19.5 |
| 2010 | 24.1 | 12.3 | 22.4 | 15.1 |
| 2011 | 27.4 | 10.5 | 26.7 | 13.6 |
| 2012 | 26.4 | 12.5 | 30.2 | 14.1 |
| 2013 | 22.1 | 13.7 | 24.8 | 11.4 |
| 2014 | 19.7 | 13.7 | 26.1 | 14.5 |
| 2015 | 14.1 | 15.9 | 27.8 | 18.3 |
| 2016 | 10.2 | 16.7 | 26.9 | 16.3 |
Composition of central government revenue in Algeria, 2000–2016 (in billions of dinars).
| Nontax revenues | Customs duties | Registration and stamps | Taxes on goods and services | Taxes on income and profits | Hydrocarbon revenue | |
|---|---|---|---|---|---|---|
| 2000 | 15,4 | 86,3 | 16,2 | 165,0 | 349.5 | 1213,2 |
| 2001 | 90,3 | 103,7 | 16,8 | 179,3 | 398.2 | 1013,4 |
| 2002 | 112,2 | 128,4 | 18,9 | 223,5 | 482.9 | 1007,9 |
| 2003 | 69,7 | 143,8 | 19,3 | 233,9 | 524.9 | 1350,2 |
| 2004 | 63,7 | 138,8 | 19.6 | 274,0 | 580.4 | 1570,7 |
| 2005 | 89.5 | 143.9 | 19.6 | 308.8 | 640.5 | 2 352.7 |
| 2006 | 119.7 | 114.8 | 23.5 | 341.3 | 720.8 | 2 799.0 |
| 2007 | 124.1 | 133.1 | 28.1 | 347.4 | 766.8 | 2 796.8 |
| 2008 | 136.7 | 137 | 33.6 | 435.2 | 332 | 4 088.6 |
| 2009 | 115.9 | 117 | 35.8 | 478.4 | 462 | 2 412.7 |
| 2010 | 189.9 | 190 | 39.7 | 515.3 | 562 | 2905 |
| 2011 | 283 | 283 | 47 | 573 | 685 | 3 980 |
| 2012 | 243 | 355 | 58 | 685 | 886 | 4 184 |
| 2013 | 248 | 404 | 63 | 742 | 823 | 3678 |
| 2014 | 258 | 371 | 71 | 769 | 881 | 3388 |
| 2015 | 323 | 406 | 82 | 815 | 1050 | 2375 |
| 2016 | 217 | 427 | 89 | 938 | 1162 | 1728 |
Source: International Monetary Fund 1998/2004/2006/2009/2012
Composition of central government expenditure in Algeria, 2000–2016 (in billions of dinars).
| Material and supplies | Mudjahidins’ pensions | Wages and salaries | Interest payments | Current transfers | Capital expenditure | |
|---|---|---|---|---|---|---|
| 2000 | 54,6 | 57,7 | 281,1 | 162,3 | 200,0 | 321,9 |
| 2001 | 46,3 | 54,4 | 315,4 | 147,5 | 276,8 | 357,4 |
| 2002 | 68,5 | 73,8 | 339,9 | 137,2 | 334,3 | 452,9 |
| 2003 | 58,8 | 62,7 | 392,8 | 114,0 | 326,1 | 570,4 |
| 2004 | 71,7 | 69,2 | 442,3 | 85,2 | 396,0 | 646,3 |
| 2005 | 76.0 | 79.8 | 490.1 | 73.2 | 520.2 | 810.6 |
| 2006 | 95.7 | 92.5 | 531.3 | 70.0 | 645.6 | 1 019.0 |
| 2007 | 93.8 | 101.6 | 628.7 | 85.0 | 762.8 | 1 442.3 |
| 2008 | 111.7 | 103.0 | 826.6 | 61.4 | 1115.2 | 1973.3 |
| 2009 | 112.5 | 130.7 | 879.9 | 37.4 | 1098.9 | 1925.8 |
| 2010 | 121.8 | 151.3 | 1193.1 | 32.5 | 1195.8 | 1807.9 |
| 2011 | 130 | 163 | 1740 | 38 | 1808,1 | 1974 |
| 2012 | 135,15 | 254 | 1980 | 42 | 1950,5 | 2276 |
| 2013 | 149 | 226 | 1792 | 44 | 1920 | 1893 |
| 2014 | 162 | 218 | 1941 | 38 | 2136 | 2501 |
| 2015 | 118 | 267 | 1861 | 43 | 2407 | 3015 |
| 2016 | 59 | 279 | 1971 | 71 | 2212 | 2540 |
Sources: International Monetary Fund 1998/2004/2006/2009/2012
La Direction Générale de la Prévision et des Politiques. Ministère des Finances.
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