Fiscal Policy and Macroeconomic Stability in South Asian Countries

Abstract

The objective of this study is to analyze the relationship between fiscal policy and macroeconomic stability in South Asian countries. Specific objectives of the study are to analyze the effects of major macroeconomic variables on macroeconomic stability and to analyze the channels i.e. automatic stabilizer, cyclical fiscal policy, and discretionary fiscal policy through which fiscal policy contributes to macroeconomic stability. The study has used Keynesian model which states that in order to stimulate aggregate demand for minimizing output gap government operates through taxes and spending. The study uses data of four South Asian countries i.e. Bangladesh, India, Pakistan, and Sri Lanka from 1990 to 2015 at annual frequency and applies pooled OLS and IVLS methodology. The results showed that automatic stabilizers and cyclical policy destabilizes emerging economies instead of automatic adjustment through market mechanism to stabilize. However, discretionary policy has stabilizing impact on South Asian economies and requires efficient intervention of the government. Automatic stabilizers and cyclical policy both works efficiently and stabilizes the economy where markets work efficiently with flexibility. Emerging economies are characterized with poor market mechanism, hence government has to intervene in the market for stabilization. Government has to develop efficient markets and institutions with autonomy, as well as an active and efficient role of government is required for sustainable economic growth in emerging economies.

Product Market Competition, Financial Leverage, Risk of Financing on Financial Stability: Studies on Islamic Banks in Indonesia

“…It is not new that the financial sector has an important role in a country's economy (Munir & Riaz, 2019). In many developing countries, where the banking sector still dominates the financial sector (bank-based), banks hold the main intermediary positions necessary for economic growth.…”

Assessing The Level Of Macroeconomic Stability Of EU Countries

“…Scholars examine the dynamic relationship between foreign investment inflows and a country's overall economic development (Toyin, & Oludayol, 2020). Noteworthy is the work that examines in detail the relationship between macroeconomic stability and fiscal policy, which can be both cyclical and discretionary (Munir, K., & Riaz, N., 2019). Also, scientists (Stanciu, 2019) have built a causal chain based on financial stability as a result of macroeconomic stability and economic security of the country.…”

The Linkage Between Fiscal Policy and Financial Development: Exploring the Moderating Role of Institutional Quality in Emerging Economies

“…Fiscal policy has the potential to be beneficial in boosting aggregate demand and reviving a sluggish economy, according to one of the fundamental principles of macroeconomics (Munir & Riaz, 2019;. The possible impact of fiscal policy on the growth of the financial sector is a neglected issue, nevertheless.…”

“…Studies have also looked into the relationship between several other variables and fiscal policy. This study involves Munir and Riaz (2019), who found that monetary and fiscal policies in the sub-region had a favorable impact on economic growth. Rodriguez (2014) evidenced that lower mean growth will come from higher volatility in a credit-constrained economy, especially if the fiscal policy is pro-cyclical and the country is less developed financially.…”