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

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  • Snober Fazal
  • Muhammad Azhar Bhatti
  • Tusawar Iftikhar Ahmad

    (The Islamia University of Bahawalpur, Pakistan.)

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.

Suggested Citation

  • Snober Fazal & Muhammad Azhar Bhatti & Tusawar Iftikhar Ahmad, 2019. "Sectorial growth, Exchange rate and Fiscal policy in Developing Economies: The Interlinkages," iRASD Journal of Economics, International Research Alliance for Sustainable Development (iRASD), vol. 1(2), pages 68-81, December.
    • Handle: RePEc:ani:irdjoe:v:1:y:2019:i:2:p:68-81
    DOI: https://doi.org/10.52131/joe.2019.0101.0006
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    More about this item

    Keywords

    Sectorial Growth; Exchange rate; Fiscal policy; Capital Formation; Foreign Direct Investment; Trade; Inflation; Foreign Aid; External debt; Money Supply; 3SLS;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F3 - International Economics - - International Finance
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • P4 - Political Economy and Comparative Economic Systems - - Other Economic Systems

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