Asymmetric effects of oil revenue on government expenditure: insights from oil‐exporting developing countries

Abstract

AbstractThis study was aimed at investigating the asymmetric effect of oil revenue on government expenditures in developing oil‐exporting countries, as most previous studies on the subject had presumed a symmetric oil revenue–government expenditure nexus. Thus, a non‐linear panel ARDL was employed to determine how government expenditures respond to positive and negative shocks to oil revenue. Regression estimates indicated that both total and health government expenditures respond asymmetrically to positive and negative changes in oil revenue in the long run, while the responses are symmetric in the short run. The results bespeak the limitation in modelling long‐run oil revenue–government expenditure nexus models symmetrically and the need to consider asymmetry when modelling the relationship between the two variables. The findings also bring to the fore the need for developing oil‐exporting countries to diversify their economies in order to extend their revenue sources, as such would greatly reduce the susceptibility of government expenditure, especially health expenditure to oil revenue busts. Furthermore, stabilisation funds from oil revenue booms if used and properly managed can help to moderate the negative impact of oil revenue busts in these countries.