The Curse of Transfers? Modelling Fiscal Policy Effectiveness in Azerbaijan

Abstract

The article aims to provide a new approach to the modelling of fiscal policy effectiveness in Azerbaijan. It is argued that massive transfer of oil revenues from SOFAZ to state budget after 2008 has sharply declined the impact of budget expenditures over non-oil sector economic performance, so called fiscal policy effectiveness. Research covers 2000Q1-2018Q1 period.

Application of various break point tests to the period of 2000Q1-2018Q1 presents existence of break in 2009Q3. Therefore, periods of 2000Q1- 2009Q3 and 2009Q3-2018Q1 are taken separately to assess long-run fiscal policy effectiveness in Azerbaijan. Empirical results of various
cointegration methods all together supports the proposed claim that fiscal policy effectiveness has decreased significantly in the second period compared to the first. It is argued that the sharp fall is mostly due to the use of easy gained revenues, so called “the curse of transfers”. Results of the
study are fairly useful for policy officials to consider while preparing budget proposals under the pressure of low oil prices.

Keywords: Fiscal policy effectiveness; Non-oil growth; Oil revenues; Resource curse. Azerbaijan; SOFAZ

JEL Classification: H21; H30; H50; Q32; Q33; Q43; Q48