Sectorial growth, Exchange rate and Fiscal policy in Developing Economies: The Interlinkages

Snober Fazal, Muhammad Azhar Bhatti and Tusawar Iftikhar Ahmad ()
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Tusawar Iftikhar Ahmad: The Islamia University of Bahawalpur, Pakistan.

iRASD Journal of Economics, 2019, vol. 1, issue 2, 68-81

Abstract: TThe study examined the interdependence of sectorial growth, exchange rate and fiscal policy by simultaneous equation model for 50 developing economies for 2000 to 2014. Industrial GDP, service sector GDP, exchange rate,tax revenue are endogenous variables, while capital formation, foreign direct investment, trade, inflation, foreign aid, external debt and money supply are instruments. The study has 4 system of equations and estimated by simultaneous equations models (SEMs) through three-stage least squares (3SLS) estimator presented by (Zellner & Theil, 1962), the result of the study indicates that sectorial growth and fiscal policyhave positive relationships because of tax exemption or reduction generates a great impact on sectoral growth. Sectorial growth and exchange rate have a positive relation. The study also indicates that the exchange rate and fiscal policy are negatively related. A rise in government spending reduces the exchange rate. So the government of developing economies should increase revenues from non-tax sources instead of taxes, an upsurge in taxes decrease the exchange rate and ultimately increased in the sectoral growth.

Keywords: Sectorial Growth; Exchange rate; Fiscal policy; Capital Formation; Foreign Direct Investment; Trade; Inflation; Foreign Aid; External debt; Money Supply; 3SLS (search for similar items in EconPapers)
JEL-codes: C33 E31 E51 F3 F35 F43 O16 O23 P4 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:ani:irdjoe:v:1:y:2019:i:2:p:68-81

DOI: 10.52131/joe.2019.0101.0006

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