Fiscal policy in the BRICs
-
Fredj Jawadi
,
Sushanta K. Mallick
Abstract
This paper assesses the macroeconomic impact of fiscal policy shocks for four key emerging market economies – Brazil, Russia, India and China (BRICs) – using a fully simultaneous system of equations. We also estimate fiscal policy rules and analyze the importance of nonlinearity using a smooth transition (STR) model. Drawing on quarterly data, we find that government spending shocks have strong Keynesian effects for this group of countries while, in the case of government revenue shocks, a tax hike is harmful for output. This suggests that there is no evidence in favor of “expansionary fiscal contraction” in the context of emerging economies where spending policies are largely pro-cyclical. Our findings also show that considerations about growth (in the case of China), exchange rate and inflation (for Brazil and Russia) and commodity prices (in India) drive the nonlinear response of fiscal policy to the dynamics of the economy.
- 1
As we saw in the aftermath of the Asian financial crisis, fiscal consolidation was not successful and IMF-supported stabilization programmes, in particular, fiscal austerity measures, contributed to the collapse of output in the first year of the programme (Mallick 2006).
- 2
This is in contrast with monetary policy which has become firmly based on the use of interest rate as the key policy instrument (Arestis and Sawyer 2008).
- 3
For an early literature on the role of fiscal policy in the process of economic development, see Easterly and Rebelo (1993). Nijkamp and Poot (2004) provide evidence that, on balance, the positive effect of conventional fiscal policy on growth is rather weak.
- 4
Kneller, Bleaney, and Gemmell (1999) and Kneller, Gemmell, and Sanz (2011) point out that a model can be mis-specified if only one side of fiscal policy is accounted for. In our case, including both sides of the fiscal policy in the contemporaneous relationships that characterize the Г0 matrix is not possible, as this would not allow the correct identification of the fiscal policy reaction functions. In line with the literature (Kneller, Bleaney, and Gemmell 1999; Bleaney, Gemmell, and Kneller 2001; Kneller, Gemmell, and Sanz 2011), omitting one variable that is assumed to be the compensating element within the government budget constraint is required for identification purposes. As a result, each fiscal parameter can be interpreted as the effect of a unit change in the relevant fiscal variable offset by a unit change in the fiscal element that is omitted from the regressions. Given that the fully simultaneous system of equations is dynamic and can be represented as an AR(1) process, the lagged values of government spending (revenue) enter in the specification of government revenue (spending).
- 5
In this model, the inclusion of either the contemporaneous (as recommended by Kneller, Bleaney, and Gemmell 1999; Kneller, Gemmell, and Sanz 2011) or the lagged values of one side of fiscal policy on the reaction function of the other side of fiscal policy can complicate the identification of the threshold variable. Consequently, our framework is in line with the work of Agnello, Castro, and Sousa (2012).
- 6
The use of government consumption instead of total government spending is in line with the work of Fatás and Mihov (2013), and can be explained by the fact that the former is not subject to changes in definitions or structural breaks. Moreover, it is comparable across countries. Additionally, Ilzetki and Vegh (2008) argue that one should look at instruments (such as government consumption), not outcomes (such as government spending).
- 7
Given the lack of disaggregate government spending and revenue data, we cannot control for the composition effects of fiscal policy (Kneller, Bleaney, and Gemmell 1999; Arin, Mamun, and Purushothman 2009; Kneller, Gemmell, and Sanz 2011). Similarly, we highlight that a fiscal poly rule summarizes the goals of debt sustainability and demand stabilization (Agnello, Castro, and Sousa 2012). From a theoretical perspective, public debt in emerging market economies remains low and, consequently, does not represent a threat for fiscal policy. From an empirical point of view, quarterly data for public debt is not readily available for these countries. As a result, we consider fiscal policy reaction functions that do not include the dynamics of public debt.
- 8
For more details, see Van Dijk, Teräsvirta, and Franses (2002).
- 9
For brevity, we do not report the results, but they are available upon request.
Acknowledgement
We gratefully acknowledge the constructive comments made by the two anonymous referees of this journal, and Editor, Professor Bruce Mizrach. An earlier version of this paper was presented at the Second International Symposium in Computational Economics and Finance (ISCEF2012: www.iscef.com), March 15–17, 2012, Sousse, Tunisia. The usual caveat applies.
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©2014 by Walter de Gruyter Berlin/Boston
Articles in the same Issue
- Frontmatter
- Assessing the quality of volatility estimators via option pricing
- Forecasting trading volume in the Chinese stock market based on the dynamic VWAP
- Saddle-node bifurcations in an optimal growth model with preferences for wealth habit
- Time-varying fiscal policy in the US
- Are income differences within the OECD diminishing? Evidence from Fourier unit root tests
- Fiscal policy in the BRICs
Articles in the same Issue
- Frontmatter
- Assessing the quality of volatility estimators via option pricing
- Forecasting trading volume in the Chinese stock market based on the dynamic VWAP
- Saddle-node bifurcations in an optimal growth model with preferences for wealth habit
- Time-varying fiscal policy in the US
- Are income differences within the OECD diminishing? Evidence from Fourier unit root tests
- Fiscal policy in the BRICs
