Fiscal Policy and Macroecomonic Stability in South Asian Countries

The objective of this study is to analyze the relationship between fiscal policy and macroeconomic stability in South Asian countries. Specific objectives of the study are to analyze the effects of major macroeconomic variables on macroeconomic stability and to analyze the channels i.e. automatic stabi¬lizer, cyclical fiscal policy, and discretionary fiscal policy through which fiscal policy contributes to macroeconomic stability. The study has used Keynesian model which states that in order to stimulate aggregate demand for minimizing output gap government operates through taxes and spending. The study uses data of four South Asian countries i.e. Bangladesh, India, Pakistan, and Sri Lanka from 1990 to 2015 at annual frequency and applies pooled OLS and IVLS methodology. The results showed that automatic stabilizers and cyclical policy destabilizes emerging economies instead of automatic adjust¬ment through market mechanism to stabilize. However, discretionary policy has stabilizing impact on South Asian economies and requires efficient intervention of the government. Automatic stabilizers and cyclical policy both works efficiently and stabilizes the economy where markets work efficiently with flexibility. Emerging economies are characterized with poor market mechanism, hence government has to intervene in the market for stabilization. Government has to develop efficient markets and institu¬tions with autonomy, as well as an active and efficient role of government is required for sustainable economic growth in emerging economies.