Fiscal Policy Response to Public Debt: Evidence for the MENA Region

Moez Ben Tahar (), Sarra Ben Slimane and Raja AlMarzoqi

No 1542, Working Papers from Economic Research Forum

Abstract: This paper deals with fiscal sustainability by estimating fiscal reaction functions (FRF) for a panel of 15 MENA countries over the period 1990-2019. In investigating the question, this paper used various methods including the System General Method of Moments (System GMM), and the common correlated effects mean group (CCEMG) estimator. Our findings reveal that MENA countries are fiscally responsible, as evidenced by the positive and significant response in the primary balance to changes in the lagged debt-to-GDP ratio, and those countries adjust along the expenditure margin. Moreover, we find robust evidence of a nonlinear fiscal policy response to debt accumulation. We also show that the fiscal policy stance tends to be countercyclical, but government spending has a procyclical bias. Further, fiscal authorities in oil-exporting countries respond more strongly to rising debt levels than in net oilimporting countries.

Pages: 24
Date: 2022-02-20, Revised 2022-02-20
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