FISCAL CYCLICALITY IN SOUTH AFRICAN PUBLIC EXPENDITURES: DO ASYMMETRIES EXPLAIN THE INCONSISTENCIES?

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Date: Spring 2021
From: Journal of Developing Areas(Vol. 55, Issue 2)
Publisher: Tennessee State University
Document Type: Article
Length: 6,464 words
Lexile Measure: 1700L

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Abstract :

The most recent sub-prime crisis, the Euro-debt crisis and the global recessionary period have resurrected a debate on the nature of fiscal cyclicality in the South African economy. Previous literature on the South African economy has been inconclusive and we attribute this inconclusiveness to possible asymmetries existing in the fiscal cyclicities. Our study questions whether the cyclicality of public policy has evolved asymmetrically and holds differently over the recessionary and expansionary phases of the South African business cycle for a quarterly period of 2001:01 - 2018:04. To ensure that the business cycle is inherent to our estimation process we rely on the nonlinear autoregressive distributive lag (N-ARDL) model as empirical framework. For comparative purposes, we firstly examined fiscal cyclicality in fiscal expenditures by estimating the conventional ARDL using H-P filter to extract cyclical terms. Our preliminary results point to fiscal procyclicity in fiscal expenditures over the short-run but not over the long-run. However, in proceeding to our main empirical N-ARDL estimates, we observe nonlinear behaviour in the cyclicality of fiscal expenditures in which fiscal authorities behave procyclical in the upswing of the business cycle whilst behaving countercyclical during economic downswings. These findings are robust to alternative specifications, inclusion of control variables and estimations across different subsamples corresponding the pre- and post- 2007 financial crisis. Our findings have two important policy implications. Firstly, our findings reveal fiscal authorities have been implementing wrong policies during the upswing of the business cycle whilst implementing correct fiscal policies during the downswing. Secondly, our findings implore fiscal authorities to incorporate asymmetric fiscal cyclicality within the design of optimal fiscal policy rules in order to avoid making policy decisions based on inaccurate diagnosis of fiscal behaviour. JEL Classifications: C32, C51, C52, E32, E62 and H61 Keywords: Fiscal cyclicality; Business cycles; Nonlinear autoregressive distributive lag (NARDL) model; South Africa; Emerging Market economies, Sub-Saharan Africa (SSA). Contact author's email address: Email: phiricandrew@gmail.com

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Gale Document Number: GALE|A641753915