Navigating Cyclicality of Fiscal Policy in Vietnam: An Empirical Investigation

Research Article

While fiscal policy has been operated counter-cyclically in most of the developed countries (DCs), the reverse trend has been found in most of the low income developing countries (LDCs). This conclusion has been drawn in the literature during the past decades based on the correlation between fiscal and business cycle indicators. This phenomenon of LDCs is more pronounced during recessions due to the limitations in the credit markets as well as other social political distortions. This paper is the first effort to introduce an empirical investigation on the cyclical behavior of fiscal instruments in Vietnam using Autoregressive Distributed Lag (ARDL) model. Fiscal balance is used as an indicator of fiscal instrument while business cycle is revealed via real GDP growth rate. In ARDL model, apart from the short-run effects, the long-run relationship between real GDP growth rate, public debt, net inflows of foreign direct investment, and fiscal balance is settled. Though the findings of cyclicality are inconclusive in the specification, it is suggested to pay more attention to pro-cyclicality and Vietnamese government should implement a counter-cyclical fiscal policy so as to regulate the economy much better.

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