Towards an effective fiscal stimulus: evidence from Botswana

Timuno, Sayed O.M and Eita, Joel Hinaunye (2020): Towards an effective fiscal stimulus: evidence from Botswana.

Abstract

While there is a general agreement on the effectiveness of fiscal stimulus, there is no consensus on which stimulus is better. To address this concern, this paper uses a Dynamic Stochastic General Equilibrium (DSGE) model to propose a fiscal stimulus that Botswana can adopt given the slowing mining productivity. The results suggest that short-run macroeconomic stabilisation can be achieved through a cut in labour taxes. This fiscal stimulus generates larger growth multipliers and contributes relatively more employment compared to a cut in consumption tax and increases in government spending. The findings also revealed that a cut in labour taxes improves trade balance, resulting in a greater accumulation of international reserves and has no Dutch disease effects. These results suggests the need for a labour tax policy reform. These results also offer some policy options for other developing countries which may face similar fiscal risks in future.

• Item Type: MPRA Paper
• Language: English
• Keywords: fiscal stimulus; fiscal policy, DSGE; Botswana
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C61 - Optimization Techniques ; Programming Models ; Dynamic Analysis; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General

References

Acemoglu, D., Johnson, S. and Robinson, J.A. (2002). An African success story: Botswana. MIT Department of Economics Working Paper No. 01/37.https://ssrn.com/abstract=290791

Alesina, A. and Ardagna, S. (2010). Large changes in fiscal policy: Taxes versus spending. Tax Policy and the Economy, 24(1): 35-68.

Aliyu, J, A., and Tijjani, M, S. (2015). Asymmetric cointegration between exchange rate and trade balance in Nigeria, Cogent Economics & Finance, (3)1, 1045213, DOI: 10.1080/23322039.2015.1045213

Arestis, P. (2011). Fiscal policy is still an effective instrument of macroeconomic policy. Panoeconomicus, 58(2): 143-156.

Arestoff, F. and Hurlin, C., (2010). Are public investment efficient in creating capital stocks in developing countries. Economics Bulletin, 30(4), pp.3177-3187.

Arizala, F., Gonzalez-Garcia, M.J.R., Tsangarides, M.C.G. and Yenice, M. (2017). The Impact of Fiscal Consolidations on Growth in Sub-Saharan Africa. IMF Working Papers 17/271, pp.1-33.

Auerbach, A.J. and Gorodnichenko, Y. (2016). Effects of fiscal shocks in a globalized world. IMF Economic Review, 64(1): 177-215.

Bank of Botswana. (2007). Annual Report. http://www.bob.bw/assets/uploaded/Statistical%20Section%202007.pdf

Bank of Botswana. (2010). Annual Report. http://www.bankofbotswana.bw/assets/uploaded/BoB%20AR%202010%20Main_1.pdf.

Bank of Botswana. (2014). Annual Report. http://www.bob.bw/assets/uploaded/BoB-AR-2014%20WEB-STAT.pdf

Barro, R.J. (1990). Government spending in a simple model of endogeneous growth. Journal of political economy, 98(5): S103-S125.

Basdevant, O., Benicio, D., Mircheva, B., Mongardini, J., Verdier, G., Yang, S. and Zanna, L.F. (2011). The design of fiscal adjustment strategies in Botswana, Lesotho, Namibia, and Swaziland. IMF Working Papers 11/266:1-38.

Berg, A., Gottschalk, J., Portillo, R. and Zanna, L.F. (2010). The macroeconomics of medium-term aid scaling-up scenarios. IMF Working Papers 10/160:1-45.

Berg, M.A., Portillo, R., Buffie, M.E.F., Pattillo, M.C.A. and Zanna, L.F. (2012). Public investment, growth, and debt sustainability: Putting together the pieces. IMF Working Papers 12/144:1-54. Berg, A., Portillo, R., Yang, S.C.S. and Zanna, L.F. (2013). Public investment in resource-abundant developing countries. IMF Economic Review, 61(1): 92-129.

Bi, H., Shen, M.W. and Yang, M.S.C.S. (2014). Fiscal limits, external debt, and fiscal policy in developing countries. IMF Working Papers 14/49:1-37.

Bhattarai, K., & Trzeciakiewicz, D. (2017). Macroeconomic impacts of fiscal policy shocks in the UK: A DSGE analysis. Economic Modelling, 61:321-338.

Blanchard, O., Erceg, C.J. and Lindé, J. (2017). Jump-starting the Euro-area recovery: Would a rise in core fiscal spending help the periphery? NBER Macroeconomics Annual, 31(1):103-182.

Cacciatore, M. and Traum, N. (2018). Trade Flows and Fiscal Multipliers. CEPR Discussion Paper No. DP12960. https://ssrn.com/abstract=3190200

Caldara, D., and Kamps, C. (2017). The analytics of SVARs: A unified framework to measure fiscal multipliers. The Review of Economic Studies, 84(3):1015–1040,

Christiano, L., Eichenbaum, M. and Rebelo, S. (2011). When is the government spending multiplier large? Journal of Political Economy, 119(1):78-121.

Coenen, G., Straub, R. and Trabandt, M. (2013). Gauging the effects of fiscal stimulus packages in the Euro area. Journal of Economic Dynamics and Control, 37(2):367-386.

D’Alessandro, A., Fella, G. and Melosi, L. (2018). Fiscal stimulus with learning‐by‐doing. FRB of Chicago Working Paper No. 2018-9. https://ssrn.com/abstract=3203588

Davig, T. and Leeper, E.M. (2009). Expectations and fiscal stimulus. CAEPR Working Papers No.006-2009. https://ssrn.com/abstract=1416885

Delong, J. B. and L. Summers. (2012). Fiscal policy in a depressed economy. Brookings Papers on Economic Activity, 43(1):233–97.

Drygalla, A., Holtemöller, O. & Kiesel, K. (2017). The effects of fiscal policy in an estimated DSGE model: The case of the German stimulus packages during the great recession. IWH Discussion Papers, 34/2017.

Easterly, W. and Rebelo, S., 1993. Fiscal policy and economic growth: An empirical investigation. Journal of Monetary Economics, 32:417–458.

Eggertsson, G.B. (2008). Can tax cuts deepen recessions? Federal Reserve Bank of New York, December. https://www.ny.frb.org/research/economists/eggertsson/

Erceg, C.J. and Lindé, J. (2013). Fiscal consolidation in a currency union: Spending cuts vs. tax hikes. Journal of Economic Dynamics and Control, 37(2): 422-445.

Estevão, M.M.M. and Samaké, I. (2013). The economic effects of fiscal consolidation with debt feedback. IMF Working Papers 13/136:1-51.

Fazzari, S.M., Morley, J. and Panovska, I. (2015). State-dependent effects of fiscal policy. Studies in Nonlinear Dynamics & Econometrics, 19(3):285–315.

Fève, P. and Sahuc, J.G. (2017). In search of the transmission mechanism of fiscal policy in the Euro area. Journal of Applied Econometrics, 32(3):704–718.

Finmark Trust. (2014). FinScope Consumer Survey Botswana: http://www.finmark.org.za/wp-content/uploads/2015/07/Brochure_FS_Botswana_2014_Consumer1.pdf

Fleming, J.M. (1962). Domestic Financial Policies Under Fixed and Under Floating Exchange Rates. IMF Staff Papers, 9(3): 369–380.

Friedman, M. (1959). A program for monetary stability (No. 3). Ravenio Books. Bronx, NY: Fordham University Press.

Galí, J., López-Salido, J.D. and Vallés, J. (2007). Understanding the effects of government spending on consumption. Journal of the european economic association, 5(1):227-270.

Gnip, A.G. (2015). Empirical assessment of stabilization effects of fiscal policy in Croatia. Romanian Journal of Economic Forecasting, 18(1):47–69.

Gros, D. and Mayer, T. (2012). A sovereign wealth fund to lift Germany’s curse of excess savings. CEPS Policy Briefs, No. 280. https://ssrn.com/abstract=2145918

Hamilton, J.D. (2009). Understanding crude oil prices. The Energy Journal, 30(2):179-206

Harvey, C. and Lewis Jr, S.R. (1990). Policy choice and development performance in Botswana. Basingstoke and London, Macmillan, in association with the O.E.C.D. Development Centre, Paris; New York, St Martin's Press.

Hemming, R., Mahfouz, S. and Kell, M. (2002). The effectiveness of fiscal policy in stimulating economic activity: A review of the literature. IMF Working Papers 02/208:1-53.

Hur, S.K., Mallick, S. and Park, D. (2014). Fiscal policy and crowding out in developing Asia. Environment and Planning C: Government and Policy, 32(6):1117–1132.

Ilzetzki, E., Mendoza, E.G. and Végh, C.A. (2013). How big (small?) are fiscal multipliers? Journal of Monetary Economics, 60(2):239-254.

Iwata, Y. (2011). The government spending multiplier and fiscal financing: Insights from Japan. International finance, 14(2):231-264.

Iyoboyi, M., and Muftau, O. (2014). Impact of exchange rate depreciation on the balance of payments: Empirical evidence from Nigeria, Cogent Economics & Finance, 2 (1), 923323, DOI: 10.1080/23322039.2014.923323

Jacquinot, P., Lozej, M. and Pisani, M. (2018). Labour tax reforms, cross-country coordination and the monetary policy stance in the euro area: A structural model-based approach. Working Paper Series 2127, European Central. https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2127.en.pdf

Jha, S., Mallick, S.K., Park, D. and Quising, P.F. (2014). Effectiveness of countercyclical fiscal policy: Evidence from developing Asia. Journal of Macroeconomics, 40:82–98.

Jibir, A., and Aluthge, C. (2019) Modelling the determinants of government expenditure in Nigeria, Cogent Economics & Finance, 7(1), 1620154

Junior, C.J.C. and Sampaio, A.V. (2014). Tax Reduction Policies of the Productive Sector and Its Impacts on Brazilian Economy, Dynare Working Papers Series (No. 36). CEPREMAP. https://www.dynare.org/wp-repo/dynarewp036.mod

Keynes, M.J. (1936). The general theory of employment, interest, and money. Kessinger Publishing. Montana, USA.

Krugman, P. (2010). British fashion victims. The New York Times, 21.

Kojo, N.C. (2010). Diamonds are not forever: Botswana medium-term fiscal sustainability. Policy Research working paper; no. WPS 5480. World Bank. https://openknowledge.worldbank.org/handle/10986/3962

Leeper, E. M., Walker, T.B., and Yang, S. C. S. (2010). Government investment and fiscal stimulus. Journal of Monetary Economics, 57:1000–1012

Li, S.M. and Spencer, A.H. (2016). Effectiveness of the Australian fiscal stimulus package: A DSGE analysis. Economic Record, 92(296):94–120.

Lorusso, M. and Pieroni, L. (2019). Disentangling Civilian and Military Spending Shocks: A Bayesian DSGE Approach for the US Economy. Journal of Risk and Financial Management, 12(3), p.141.

Magweva, R., and Sibanda, M. (2020). Inflation and infrastructure sector returns in emerging markets—panel ARDL approach, Cogent Economics & Finance, 8(1), 1730078.

Malik, Z, K., Ali, Z, S., Imtiaz, A., and Aftab, A. (2019). Preference shocks in an RBC model with intangible capital, Cogent Economics & Finance, 7(1), 1586621, DOI:10.1080/23322039.2019.1586621.

Melina, M.G., Yang, M.S.C.S. and Zanna, L.F. (2014). Debt sustainability, public investment, and natural resources in developing countries: The DIGNAR model. IMF Working Papers 14/50:1-41.

Ministry of Finance and Development Planning Botswana. (2009). National Development Plan 10. https://www.finance.gov.bw/images/NDP-TEN/NDP_TEN_final.pdf

Ministry of Finance and Economic Development Botswana. (2014). Budget Strategy Paper https://www.finance.gov.bw/images/speeches/2015BudgetSpeech/2015-16BudgetStrategyPaper.pdf

Ministry of Finance and Economic Development Botswana. (2017). Financial Statement of the Consolidated Fund. https://www.finance.gov.bw/images/DevelopmentandBudget/Financial_Tables_20152016_22_01_2015.pdf

Mountford, A., and H. Uhlig. (2009). What are the effects of fiscal policy shocks? Journal of Applied Econometrics, 24(6): 960–992.

Mucka, Z. (2016). Fiscal Policy Matters: A New DSGE Model for Slovakia. Discussion Papers No. 1/20, Council for Budget Responsibility.

Mundell, R.A. (1963). Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economics and Political Science/Revue Canadienne de Economiques et Science Politique, 29(4):475-485.

Nasir, A. M., Yago, M., Soliman M, A., and Wu, J. (2016). Financial stability, wealth effects and optimal macroeconomic policy combination in the United Kingdom: A new-Keynesian dynamic stochastic general equilibrium framework, Cogent Economics & Finance, 4(1), 1136098, DOI: 10.1080/23322039.2015.1136098

Omolade, O., Ngalawa, H., and Kutu , A. (2019) Crude oil price shocks and macroeconomic performance in Africa’s oil-producing countries, Cogent Economics & Finance, 7(1), 1607431

Perotti, R. (2005). Estimating the effects of fiscal policy in OECD countries. CEPR Discussion Paper No. 4842. https://ssrn.com/abstract=717561

Petrovic, P., Arsic, M. and Nojkovic, A. (2014). Fiscal multipliers in emerging European economies. http://dx.doi.org/10.2139/ssrn.2402170.

Phillips, A.W. (1958). The relationship between unemployment and the rate of change of money wages in the United Kingdom 1861-1957. Economica, 25(100):283–299.

Primus, K. (2016). Fiscal Rules for Resource Windfall Allocation: The Case of Trinidad and Tobago. IMF Working Papers 16/188:1-48.

Ramey, V.A. and Zubairy, S. (2018). Government spending multipliers in good times and in bad: Evidence from US historical data. Journal of Political Economy, 126(2):850–901.

Riera-Crichton, D., Vegh, C.A. and Vuletin, G. (2012). Tax multipliers: Pitfalls in measurement and identification. Journal of Monetary Economics. 79:30-48

Romer, P.M. (1986). Increasing returns and long-run growth. Journal of Political Economy, 94(5):1002–1037.

Romer, C.D. and Romer, D.H. (2010). The macroeconomic effects of tax changes: Estimates based on a new measure of fiscal shocks. American Economic Review, 100(3):763-801.

Schmitt-Grohe, S. and Uribe, M. (2003). Closing Small Open Economy Models. Journal of International Economics, vol. 61(1):163-185.

Statistics Botswana. (2018). Gross Domestic Product Quarter 3. http://www.statsbots.org.bw/sites/default/files/publications/Gross%20Domestic%20Product%20Quarter%203%2C%202018.pdf

Statistics Botswana. (2016). International merchandise trade statistics http://www.statsbots.org.bw/sites/default/files/publications/IMTS%20DECEMBER%202016.pdf

Statistics Botswana. (2016). National accounts statistics report http://www.statsbots.org.bw/sites/default/files/publications/National%20Accounts%20%202016.pdf

Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy 39:195-214. North-Holland

Van Brusselen, P. (2010). Fiscal stabilisation plans and the outlook for the world economy. Bank of Italy Occasional Paper. https://ssrn.com/abstract=1985198

Vlasov, S.A. and Deryugina, E.B. (2018). Fiscal multipliers in Russia. Journal of Economic Theory Studies of the Russian Economy Issues of Economic Policy Hot Topic, 2(38):83–95.