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

Publication | August 2010
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Using historical data from 10 developing Asian countries, this paper finds evidence suggesting tax cuts are more effective countercyclical policy instruments than government spending.

As the global crisis hit developing Asia, several countries instituted fiscal stimulus measures to create domestic demand. With the region returning to normal times, this paper draws 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, a sign-restrictions-based structural vector autoregression model was used.

The paper finds 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, two policy experiments: deficit-financed tax cuts and deficit spending were performed and compared. 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.

Contents

  • Abstract
  • Introduction
  • Empirical Framework and Data Adjustments
  • Results from the Empirical Analysis
  • Summary and Concluding Observations
  • Appendix
  • References

Additional Details

Authors
Type
Series
Subjects
  • Economics
  • Finance sector development
SKU
  • WPS102320
ISSN
  • 1655-5252 (Print)

Published Version

Jha, Shikha, Sushanta K. Mallick, Donghyun Park, and Pilipinas F. Quising. 2014. "Effectiveness of Countercyclical Fiscal Policy: Evidence from Developing Asia." Journal of Macroeconomics 40: 82–98. https://doi.org/10.1016/j.jmacro.2014.02.006.

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