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

33 Pages Posted: 24 Sep 2010

See all articles by Shikha Jha

Shikha Jha

Asian Development Bank

Sushanta Mallick

Queen Mary - University of London

Donghyun Park

Asian Development Bank - Economic Research

Pilipinas Quising

Asian Development Bank - Economic Research

Date Written: August 2010

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.

Keywords: Fiscal policy shocks, tax cuts, government expenditure, business cycles, economic growth, Asia

JEL Classification: E60, E62, E63, H20, H50, H60

Suggested Citation

Jha, Shikha and Mallick, Sushanta K. and Park, Donghyun and Quising, Pilipinas, Effectiveness of Countercyclical Fiscal Policy: Time-Series Evidence from Developing Asia (August 2010). Asian Development Bank Economics Working Paper Series No. 211. Available at SSRN: https://ssrn.com/abstract=1681237 or http://dx.doi.org/10.2139/ssrn.1681237

Shikha Jha (Contact Author)

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Sushanta K. Mallick

Queen Mary - University of London ( email )

School of Business and Management
Mile End Road
London, England E1 4NS
United Kingdom
+44 20 7822 7447 (Phone)

HOME PAGE: http://webspace.qmul.ac.uk/skmallick/

Donghyun Park

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Pilipinas Quising

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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