Pandemic uncertainties and fiscal procyclicality: A dynamic non-linear approach

Abstract

In the wake of the ongoing Covid-19 crisis, this study explores evidence of fiscal procyclicality to the previous pandemic cycles between 2000 and 2017 across 143 countries. Using the novel data set of the World Pandemic Uncertainty index (WPUI) and Dynamic Panel Threshold estimation after considering the endogeneity of variables as proposed by Seo and Shin (2016), this is probably the first attempt to model fiscal responsiveness on the censored and discontinuous effect of pandemic uncertainties. Asymmetric responses on public health expenditure are observed. Although evidence of fiscal procyclicality to pandemic uncertainties is found among the high-income countries and also among the debt-ridden countries, the persistence of responses is not observed in the following period. Further, we find higher relative stimulus by the public sector in low-income countries and also among high debt countries than the private sector, in combating pandemic uncertainties. The study is expected to assume significance for the policymakers as it provides historical evidence of how the Governments have reinforced healthcare during earlier pandemics.