Abstract
This paper investigates the effects of fiscal policy and institutions on the economic growth of Asian economies through the application of the GMM-SYS approach to dynamic panel estimator as a preference analysis. It examines two different channels through which fiscal policy can affect long-run economic growth in Asia. The first channel is when aggregate government expenditure, aggregate of other fiscal variables, and institution affect the real per capita GDP, and the second channel is to determine the role of institutions on the real per capita GDP. The dynamic panel data result, especially GMM-SYS, established a long-run relationship between fiscal policy, institution, and economic growth. We found positive and statistically significant impact of aggregate of government expenditure and aggregate of other fiscal variables and institution on real per capita GDP. Furthermore, we found that there is a role of institutions on the real per capita GDP.
Highlights
Fiscal policies have a benign role for economic growth in the region, namely to provide a stable macro environment for investment
This study aimed at filling a gap in literature devoted solely to achieving the objectives using the Generalised Method of Moments (GMM) estimators developed for dynamic models of panel data, introduced by Arellano and Bond (1991), Arellano and Bover (1995), and Holtz-Eakin Newey, and Rosen (1998), and the GMM-system developed by Blundell and Bond (1998)
We found that the interaction terms included, between institutions and the aggregate of government expenditure (1n GE *ins) and between institutions and the aggregate of other fiscal variables have positive coefficients [1.414 (Model 1) and 0.435 (Model 2)] and statistically significant at the 1 and 5% levels in Model 1 and Model 2, respectively
Summary
Fiscal policies have a benign role for economic growth in the region, namely to provide a stable macro environment for investment. The changed environment of liquidity constraints on external borrowing and slowdown in output growth have led to new attention being directed toward the role and contribution of fiscal policy to reviving growth in the region (Gangopadhyay & Chatterji, 2005). In the debate on economic policy, fiscal policy is predominantly viewed as an instrument to mitigate short-run fluctuations of output and employment. Fiscal policy was neither a cause of the crisis nor a critical determinant of economic growth. Its role in both the pre-crisis and postcrisis period in Asian countries has been seen as crucial, primarily in terms of its contribution to economic growth
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