Fiskal - Changing Impact of Fiscal Policy on Selected Asean

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Title: Changing Impact of Fiscal Policy on Selected ASEAN Countries Authors: Hsiao Chink Tang, Philip Liu, Eddie C. Cheung PII: DOI: Reference: To appear in: Received date: Revised date: Accepted date: S1049-0078(12)00070-X doi:10.1016/j.asieco.2012.07.003 ASIECO 865 ASIECO 1-3-2011 23-7-2012 24-7-2012

Please cite this article as: Tang, H. C., Liu, P., & Cheung, E. C., Changing Impact of Fiscal Policy on Selected ASEAN Countries, Journal of Asian Economics (2010), doi:10.1016/j.asieco.2012.07.003 This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.

Highlights:  This paper investigates the effectiveness of fiscal policy in five ASEAN economies using an open economy SVAR model.  We found government spending has no immediate and statistically significant impact on output for countries studied here.  Tax increases generate positive output growth in all countries but only statistically significant in Thailand and Indonesia.  Time-varying VAR reveal that the positive impact from higher taxes mainly concentrated around crisis periods.

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Changing Impact of Fiscal Policy on Selected ASEAN Countries Hsiao Chink Tang,* Philip Liu,** and Eddie C. Cheung***

Revised: July 2012

Abstract

This paper investigates the effectiveness of fiscal policy in five Association of Southeast Asian Nations: Indonesia, Malaysia, the Philippines, Singapore and Thailand. Through a small open economy structural vector autoregression model, government spending is found to have weak and largely insignificant impact on output, while taxes are found to have outcomes contrary to conventional theory. Extensions using a time-varying VAR model reveal that the positive impact from higher taxes on output mainly reflects heightened concerns over public finances during the Asian financial crisis and the recent global financial crisis. On the other hand, for Thailand, there is some evidence that government spending can at times be useful as a tool for short-term countercyclical policy. JEL classification: C11 E62 H20 H30 Keywords: ASEAN, fiscal policy, structural VAR, time-varying VAR

This paper has benefitted from discussions with Joshua Greene and Arief Ramayandi. Comments from anonymous referees are very much appreciated. Mara Claire Tayag provided excellent research assistance. The views expressed are the authors‗ and do not necessarily reflect the views and policies of the Asian Development Bank or the International Monetary Fund, its Board of Directors and the governments that ADB and IMF represent.

* Economist, Office of Regional Economic Integration, Asian Development Bank, 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines. Tel.: 632-632-5637, email: hctang@adb.org. th ** Economist, Strategy, Policy, and Review Department, International Monetary Fund, 700 19 St NW, Washington DC, US. Tel.: +1202-509-7776, email: philipliu.mail@gmail.com. *** Assistant Lecturer in Economics, School of Arts and Social Sciences, the Open University of Hong Kong, 30 Good Shepherd Street, Ho Man Tin, Kowloon, Hong Kong, China. Email: clcheung@ouhk.edu.hk.

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Introduction

The rest of the paper is structured as follows. Section 2 reviews the theoretical and empirical literature on the study of the effectiveness of fiscal policy. Section 3 introduces the SVAR and time-varying VAR methodologies, while section 4 delves into data and estimation issues. Section 5 presents and...
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