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Fiscal Policy Effects on Private Expenditure for Sustainable Economic Growth: A Panel VAR Study from Selected Developing Countries

Iszan Hana Kaharudin () and Mohammad Syuhaimi Ab-Rahman
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Iszan Hana Kaharudin: Centre for Liberal Studies (CITRA), Universiti Kebangsaan Malaysia, Bangi 43600, Malaysia
Mohammad Syuhaimi Ab-Rahman: Center of Alumni Engagement, Universiti Kebangsaan Malaysia, Bangi 43600, Malaysia

Sustainability, 2022, vol. 14, issue 17, 1-21

Abstract: This study examines the effects of fiscal policy on private expenditure using a panel VAR for the sample of 60 developing countries from 1990 to 2020. The VAR panel model framework was used to focus on the disaggregated government expenditures which included the defense, economic and social expenditure. The main findings showed a positive shock effect of defense expenditure which led to crowding out effect on private expenditure and domestic income. Conversely, economic and social expenditure had the crowding in effect on private consumption and domestic income. To detail out the analysis, the composition of government spending was divided into two, namely productive expenditures and non-productive expenditures. Therefore, the findings indicate that defense expenditure is non-productive since it does not stimulate an increase in private spending and national income while economic expenditure and social expenditure are classified as productive expenditure with the ability to increase economic activity. The policy implication suggests that the government should carefully examine and identify the sectors or composition that have greater potential, capacity and relevance in stimulating sustainable economic growth.

Keywords: fiscal policy; PVAR model; crowding out effect; unproductive expenditure; sustainable economic growth (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2022
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