Fiscal sustainability and output stability in the Asean-3 and selected developing countries

Abstract

This dissertation contributes to the empirical debate on three new factors influencing fiscal sustainability and economic stability. The three factors are the nonlinear reaction that violates the fiscal feedback rule, external shocks that undermine independent budgetary policy, and institutional quality that influence government spending and tax collection. There are three objectives aimed to analyzing these issues. First, this dissertation investigates the fiscal sustainability and output stability of ASEAN-3 (Indonesia, Malaysia, and Thailand) using fiscal reaction function (FRF) and adopting a non-linear autoregressive distributed lag (NARDL). Second, this dissertation analyzes factors that may affect open economies by focusing on several external exogenous shock factors that influence fiscal sustainability and economic stability in the ASEAN-3 countries. The structural auto regressive vector method (SVAR) was used to reveal the dynamic response between external shocks on fiscal sustainability by using impulse response-function and variance decomposition. The ASEAN-3 data used in this dissertation are the annual observation, covering 1973 to 2017. Finally, this study investigates the role of institutional quality on fiscal sustainability and output stability of selected developing countries by adopting panel threshold regression (PTR). This approach may determine whether institutional quality has a threshold effect on fiscal sustainability and output stability. The model used was empirically tested for 83 countries over 1996-2017.The new findings established in the study can be summarized as follows: First, the results indicate the presence of a structural break and non-linear fiscal reaction in the FRF. Further, the fiscal authorities neither guarantee fiscal sustainability nor support output stability. Second, the SVAR results confirmed that external shocks significantly affect fiscal reaction function variables. Malaysia's budgetary reaction to external shocks was shown to be more sensitive than those in Indonesia and Thailand. Finally, a positive impact of institutional quality on the budget balance do exist. However, the threshold effect of institutional quality only exists in advanced countries. Based on these findings, the following policy recommendations are suggested: First, the non-linear fiscal reaction is a fundamental information that may assist fiscal authority in designing prudent fiscal policy. Second, fiscal authorities in developing countries must closely monitor the change in external indicators and respond accordingly to achieve stable and sustainable growth. Finally, fiscal authorities should improve institutional quality to reduce fiscal deficits and public debt. Additionally, the study advocates advanced countries to elevate their institutional quality beyond threshold level. Developing countries should similarly improve their institutional quality but are not concerned with the threshold level.