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Fiscal Policy and Crowding Out in Developing Asia

Author

Listed:
  • Seok-Kyun Hur

    (College of Business and Economics, Chung-Ang University, 221, Heukseok-dong, Dongjak-gu, Seoul 156-756, Korea)

  • Sushanta Mallick

    (School of Business and Management, Queen Mary University of London, Francis Bancroft Building, Mile End Road, London E1 4NS, England)

  • Donghyun Park

    (Macroeconomics and Finance Research Division, Economics and Research Department, Asian Development Bank, 6 ADB Avenue, Mandaluyong City, Metro Manila, Philippines 1550)

Abstract
Fiscal stimulus programs have contributed substantially to developing Asia's faster and stronger-than-expected recovery from the global financial crisis. This may lead to political pressures for greater use of countercyclical fiscal policy in the postcrisis period. However, the countercyclical effectiveness of fiscal policy depends critically on the extent to which it crowds out private investment and consumption. In the medium term, the use of fiscal policy to promote rebalancing toward domestic demand may require a moderate fiscal expansion. The extent of crowding out will impinge upon the effectiveness of such fiscal expansion in boosting domestic demand. In this paper we perform empirical analysis on both cross-country panel data and country-specific time-series data to investigate crowding out in the region. Overall, our empirical evidence is decidedly mixed, with no clear evidence of either crowding out or crowding in. The evidence fails to provide compelling support for greater use of fiscal policy for countercyclical purposes. In the context of rebalancing, fiscal expansion will not, in and of itself, contribute to a more balanced demand and output structure. That would require using fiscal policy to help remove structural impediments to private consumption and investment.

Suggested Citation

  • Seok-Kyun Hur & Sushanta Mallick & Donghyun Park, 2014. "Fiscal Policy and Crowding Out in Developing Asia," Environment and Planning C, , vol. 32(6), pages 1117-1132, December.
    • Handle: RePEc:sae:envirc:v:32:y:2014:i:6:p:1117-1132
    DOI: 10.1068/c12185r
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    10. Kim, Wongi, 2021. "Macroeconomic effects of government transfer payments: Evidence from Korea," Economic Modelling, Elsevier, vol. 102(C).
    11. Jalles, João Tovar, 2021. "Dynamics of government spending cyclicality," Economic Modelling, Elsevier, vol. 97(C), pages 411-427.
    12. Zhang, Lifeng & Ru, Yucong & Li, Jingkui, 2016. "Optimal tax structure and public expenditure composition in a simple model of endogenous growth," Economic Modelling, Elsevier, vol. 59(C), pages 352-360.
    13. Babecký, Jan & Franta, Michal & Ryšánek, Jakub, 2018. "Fiscal policy within the DSGE-VAR framework," Economic Modelling, Elsevier, vol. 75(C), pages 23-37.
    14. Jiménez, Alvaro & Rodríguez, Gabriel & Ataurima Arellano, Miguel, 2023. "Time-varying impact of fiscal shocks over GDP growth in Peru: An empirical application using hybrid TVP-VAR-SV models," Structural Change and Economic Dynamics, Elsevier, vol. 64(C), pages 314-332.
    15. Germaschewski, Yin, 2020. "Stabilization policy, infrastructure investment, and welfare in a small open economy," Economic Modelling, Elsevier, vol. 84(C), pages 322-339.
    16. Sajad Ahmad Bhat & Javed Ahmad Bhat & Taufeeq Ajaz, 2020. "The Public–Private Investment Nexus In India: Evidence From A Policy Simulation Approach," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 65(224), pages 101-128, January –.
    17. Konstantin Makrelov & Channing Arndt & Rob Davies & Laurence Harris, 2018. "Fiscal multipliers in South Africa: The importance of financial sector dynamics," WIDER Working Paper Series wp-2018-6, World Institute for Development Economic Research (UNU-WIDER).
    18. Awaworyi Churchill, S. & Yew, S.L., 2017. "Are government transfers harmful to economic growth? A meta-analysis," Economic Modelling, Elsevier, vol. 64(C), pages 270-287.
    19. He, Qichun, 2018. "Inflation and health in a Schumpeterian growth model: Theory and evidence," Economic Modelling, Elsevier, vol. 75(C), pages 159-168.
    20. Sayed O. M. Timuno & Joel Hinaunye Eita & Lanouar Charfeddine, 2020. "Towards an effective fiscal stimulus: Evidence from Botswana," Cogent Economics & Finance, Taylor & Francis Journals, vol. 8(1), pages 1790948-179, January.
    21. Nicolae-Bogdan Ianc & Camelia Turcu, 2019. "So alike, yet so different: comparing fiscal multipliers across E(M)U candidates," Working Papers 2019.03, International Network for Economic Research - INFER.
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    23. Hur, Joonyoung & Lee, Kang Koo, 2017. "Fiscal financing and the efficacy of fiscal policy in Korea: An empirical assessment with comparison to the U.S. evidence," Economic Modelling, Elsevier, vol. 64(C), pages 473-486.

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    More about this item

    Keywords

    fiscal policy; stabilization; rebalancing; crowding out; consumption; investment; Asia;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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