Economic, Political and Institutional Determinants of Budget Deficits Volatility in Selected Asian Countries

In the present study the economic, political and institutional sources of budgets deficits are analysed for two regions South Asia and ASEAN countries for the period 1984 to 2010. The results reveal that high income, rising inflation and large budget to GDP ratio are associated with budget instability, where as a strong inertia in budget deficit volatility exists. The exposure of more external shocks make the budget deficit more volatile, however, countries with high population growth have less volatile budget deficits. The results indicate that high level of political stability and democracy and improvement in social and economic condition reduces the budget deficit volatility. High corruption and low institutional quality lead to more fluctuations in the budget deficit. The results suggest that political and institutional factors have a direct impact on fiscal instability beyond the economic reasons to effect fluctuations. The results of the current study leads to important implication that by improving the quality of institutions, creating situations for economic stability and moving towards democratic regimes would ensure more stable fiscal deficits and resultantly positive effect on the long term economic growth.