This study examines whether economic stability in Indonesia capable predicted by the model Mundell-Fleming. Prediction proxy stability of the interaction of fiscal and monetary policy. During Indonesia's economic stability is largely determined by the strength of economic fundamentals, while economic fundamentals are strongly influenced by fiscal and monetary policies. Therefore flemming Mundell predicts how strong the economic stability in Indonesia ?, the statement in the analysis by using a long-term predictions are Vector Autoregression. Research findings indicate patterns of interaction predictions variety of fiscal and monetary policy, both short term, medium term and long term. It turned out that fiscal policies are derived from taxes are more effective than government spending to control economic growth, investment and inflation, but government spending is more effective to control the exchange rate. The monetary policy of interest rates more effectively control the exchange rate and inflation, while the money supply is more effective in controlling the growth of economy and investment.
Expectations and Economics policy by Zegeye Paulos Borko (Asst,...Zegeye Paulos
Expectationa and Economics policy
-What do we mean by the Rational Expectations Hypothesis [REH].
-What are the implications of the REH for the conduct of economic policy?
-The “Policy-Ineffectiveness Proposition” [PIP]
-What are the implications of the REH for economicmodeling? The “Lucas critique”
This study examines whether economic stability in Indonesia capable predicted by the model Mundell-Fleming. Prediction proxy stability of the interaction of fiscal and monetary policy. During Indonesia's economic stability is largely determined by the strength of economic fundamentals, while economic fundamentals are strongly influenced by fiscal and monetary policies. Therefore flemming Mundell predicts how strong the economic stability in Indonesia ?, the statement in the analysis by using a long-term predictions are Vector Autoregression. Research findings indicate patterns of interaction predictions variety of fiscal and monetary policy, both short term, medium term and long term. It turned out that fiscal policies are derived from taxes are more effective than government spending to control economic growth, investment and inflation, but government spending is more effective to control the exchange rate. The monetary policy of interest rates more effectively control the exchange rate and inflation, while the money supply is more effective in controlling the growth of economy and investment.
Expectations and Economics policy by Zegeye Paulos Borko (Asst,...Zegeye Paulos
Expectationa and Economics policy
-What do we mean by the Rational Expectations Hypothesis [REH].
-What are the implications of the REH for the conduct of economic policy?
-The “Policy-Ineffectiveness Proposition” [PIP]
-What are the implications of the REH for economicmodeling? The “Lucas critique”
Macroeconomic stability in the DRC: highlighting the role of exchange rate an...IJRTEMJOURNAL
This study is part of a macroeconomic approach and seeks to identify the role of the rate of
economic growth and the exchange rate in controlling the macroeconomic framework. The approaches adopted
in this paper are part of Keynesian thinking on macroeconomic stability using the macroeconomic stability
index proposed by Burnside and Dollars (2004) and A. Amine (2005). Our results argue that economic growth
is causing macroeconomic stability and that the exchange rate is negatively and significantly accounting for
macroeconomic stability in the Democratic Republic of Congo.
T. Dergiades, C. Milas, T. Panagioditis
IHU, Greece, University of Liverpool, UK , University of Macedonia, Greece, LSE, UK and RCEA, Italy.
November 2015. Open Seminar at Eesti Pank
Statistical Analysis of Interrelationship between Money Supply Exchange Rates...Atif Ahmed
Several researches have been conducted to study the impact of different macro-economic variables and their influence on government expenditure. By using different statistical tools researchers have examined that how money supply and exchange rate influence the government expenditure. Few other studies also conducted work on the quarterly time series data to examine the long run equilibrium association between the macroeconomic variables.
Twin deficits: An empirical analysis on the relationship between budget defic...IFPRIMaSSP
The twin deficits hypothesis asserts that a reduction in the budget deficit causes a reduction in the current account deficit. The Keynesian hypothesis proposes that the causality runs from budget deficits to current account deficits. However; conflicting theories have been proposed, arguing that possibility exists of reverse causality from current account to budget deficit and indeed that there is no relationship between the two deficits. Proponents of the Ricardian equivalence hypothesis suggest the absence of any relationship between the current account deficit and the budget deficit. This study uses the Autoregressive Distributed Lag method of co integration to test the three proposed hypotheses using annual time series data of Malawi over the period 1970 to 2012. Results from the analysis found a positive significant long run relationship between the budget deficit and the current account deficit. Implying that in the long run budget deficit does influence the current account deficit, asserting that the Keynesian proposition holds in Malawi. No evidence was found in support of the reverse causality or the Ricardian equivalence hypothesis.
Government budget control under the period of inflation: Evidence from Madaga...iosrjce
Madagascar is rich in resource undermine, maritime and natural but have been experiencing
Inflation now for more than four decades. Many studies and papers talk about the relationship between Inflation
and Budget Deficit. This paper seeks to test the hypothesis that budget control explicated by the budget deficit
cause inflation in Madagascar with some variable economically affect the inflation such as Gross Domestic
Product, exchange rate, Money supply, budget deficits and political crises that is during a thirty-three years
period: from 1981to 2014. The methodology employed for estimating long-run relationship is Augmented Ducky
Fuller test for a stationary data then cointegration analysis, with undertaking Granger causality tests. The
findings of the study are Malagasy Budget control is not inflationary and the inflation didn’t explain the budget
control. But the variable that cause the inflation in Madagascar are the Political Crises and Money Supply
Slides about non-existence of an equilibrium in DSGE models generally, how one can modify DSGE to evade this problem, and how an understanding of interest rate rule-based monetary policy should change. Describes how New Keynesian monetary policy (Taylor rule) works as well. Paper draft in https://papers.ssrn.com/abstract=3446931
Macroeconomic stability in the DRC: highlighting the role of exchange rate an...IJRTEMJOURNAL
This study is part of a macroeconomic approach and seeks to identify the role of the rate of
economic growth and the exchange rate in controlling the macroeconomic framework. The approaches adopted
in this paper are part of Keynesian thinking on macroeconomic stability using the macroeconomic stability
index proposed by Burnside and Dollars (2004) and A. Amine (2005). Our results argue that economic growth
is causing macroeconomic stability and that the exchange rate is negatively and significantly accounting for
macroeconomic stability in the Democratic Republic of Congo.
T. Dergiades, C. Milas, T. Panagioditis
IHU, Greece, University of Liverpool, UK , University of Macedonia, Greece, LSE, UK and RCEA, Italy.
November 2015. Open Seminar at Eesti Pank
Statistical Analysis of Interrelationship between Money Supply Exchange Rates...Atif Ahmed
Several researches have been conducted to study the impact of different macro-economic variables and their influence on government expenditure. By using different statistical tools researchers have examined that how money supply and exchange rate influence the government expenditure. Few other studies also conducted work on the quarterly time series data to examine the long run equilibrium association between the macroeconomic variables.
Twin deficits: An empirical analysis on the relationship between budget defic...IFPRIMaSSP
The twin deficits hypothesis asserts that a reduction in the budget deficit causes a reduction in the current account deficit. The Keynesian hypothesis proposes that the causality runs from budget deficits to current account deficits. However; conflicting theories have been proposed, arguing that possibility exists of reverse causality from current account to budget deficit and indeed that there is no relationship between the two deficits. Proponents of the Ricardian equivalence hypothesis suggest the absence of any relationship between the current account deficit and the budget deficit. This study uses the Autoregressive Distributed Lag method of co integration to test the three proposed hypotheses using annual time series data of Malawi over the period 1970 to 2012. Results from the analysis found a positive significant long run relationship between the budget deficit and the current account deficit. Implying that in the long run budget deficit does influence the current account deficit, asserting that the Keynesian proposition holds in Malawi. No evidence was found in support of the reverse causality or the Ricardian equivalence hypothesis.
Government budget control under the period of inflation: Evidence from Madaga...iosrjce
Madagascar is rich in resource undermine, maritime and natural but have been experiencing
Inflation now for more than four decades. Many studies and papers talk about the relationship between Inflation
and Budget Deficit. This paper seeks to test the hypothesis that budget control explicated by the budget deficit
cause inflation in Madagascar with some variable economically affect the inflation such as Gross Domestic
Product, exchange rate, Money supply, budget deficits and political crises that is during a thirty-three years
period: from 1981to 2014. The methodology employed for estimating long-run relationship is Augmented Ducky
Fuller test for a stationary data then cointegration analysis, with undertaking Granger causality tests. The
findings of the study are Malagasy Budget control is not inflationary and the inflation didn’t explain the budget
control. But the variable that cause the inflation in Madagascar are the Political Crises and Money Supply
Slides about non-existence of an equilibrium in DSGE models generally, how one can modify DSGE to evade this problem, and how an understanding of interest rate rule-based monetary policy should change. Describes how New Keynesian monetary policy (Taylor rule) works as well. Paper draft in https://papers.ssrn.com/abstract=3446931
Automatic eye fixations identification based on analysis of variance and cova...Giuseppe Fineschi
Eye movement is the simplest and repetitive movement that enables humans to interact with the environment. The common daily activities, such as reading a book or watching television, involve this natural
activity, which consists of rapidly shifting our gaze from one region to another. In clinical application, the
identification of the main components of eye movement during visual exploration, such as fixations and
saccades, is the objective of the analysis of eye movements: however, in patients affected by motor control disorder the identification of fixation is not banal. This work presents a new fixation identification
algorithm based on the analysis of variance and covariance: the main idea was to use bivariate statistical
analysis to compare variance overxandyto identify fixation. We describe the new algorithm, and we
compare it with the common fixations algorithm based on dispersion. To demonstrate the performance
of our approach, we tested the algorithm in a group of healthy subjects and patients affected by motor
control disorder
Efficient discovery of frequent itemsets in large datasets is a crucial task of data mining. In recent
years, several approaches have been proposed for generating high utility patterns; they arise the problems of
producing a large number of candidate itemsets for high utility itemsets and probably degrade mining
performance in terms of speed and space. Mining high utility itemsets from a transactional database refers to the
discovery of itemsets with high utility like profits. Although a number of relevant approaches have been
proposed in recent years, they incur the problem of producing a large number of candidate itemsets for high
utility itemsets. Such a large number of candidate itemsets degrades the mining performance in terms of
execution time and space requirement
PERSONAL INFORMATION PRIVACY SETTINGS OF ONLINE SOCIAL NETWORKS AND THEIR S...ijsptm
Protecting personal information privacy has become a controversial issue among online social network
providers and users. Most social network providers have developed several techniques to decrease threats
and risks to the users’ privacy. These risks include the misuse of personal information which may lead to
illegal acts such as identity theft. This study aims to measure the awareness of users on protecting their
personal information privacy, as well as the suitability of the privacy systems which they use to modify
privacy settings. Survey results show high percentage of the use of smart phones for web services but the
current privacy settings for online social networks need to be improved to support different type of mobile
phones screens. Because most users use their mobilephones for Internet services, privacy settings that are
compatible with mobile phones need to be developed. The method of selecting privacy settings should also
be simplified to provide users with a clear picture of the data that will be shared with others. Results of this
study can be used to develop a new privacy system which will help users control their personal information
easily from different devices, including mobile Internet devices and computers.
Sqlas tool to detect and prevent attacks in php web applicationsijsptm
Web applications become an important part of our daily lives. Many other activities are relay on the functionality and security of these applications. Web application injection attacks, such as SQL injection (SQLIA), Cross-Site Scripting (XSS) and Cross-Site Request Forgery (XSRF) are major threats to the
security of the Web Applications. Most of the methods are focused on detection and prevention from these
web application vulnerabilities at Run Time, which need manual monitoring efforts. Main goal of our work
is different in the way it aims to create new systems that are safe against injection attacks to begin with, thus allowing developers the freedom to write and execute code without having to worry about these attacks. In this paper we present SQL Attack Scanner (SQLAS) a Tool which can detect & prevent SQL injection Attack in web applications. We analyzed the performance of our proposed tool SQLAS with various PHP web applications and its results clearly determines the effectiveness of detection and prevention of our proposed tool. SQLAS scans web applications offline, it reduces time and manual effort due to less overhead of runtime monitoring because it only focus on fragments that are vulnerable for attacks. We use XAMPP for client server environment and developed a TESTBED on JAVA for evaluation of our proposed tool SQLAS.
Online Social Networking has gained tremendous popularity amongst the masses. It is usual for the users
of Online Social Networks (OSNs) to share information with friends however they lose privacy. Privacy has
become an important concern in online social networks. Users are unaware of the privacy risks involved
when they share their sensitive information in the network.[1] One of the fundamental challenging issues is
measurement of privacy .It is hard for social networking sites and users to make and adjust privacy settings
to protect privacy without practical and effective way to quantify , measure and evaluate privacy. In this
paper, we discussed Privacy Index (PIDX) which is used to measure a user’s privacy exposure in a social
network. We have also described and calculated the Privacy Quotient (PQ) i.e. a metric to measure the
privacy of the user’s profile using the naive approach. [2] The users should be aware of their privacy
quotient and should know where they stand in the privacy measuring scale. At last we have proposed a
model that will ensure privacy in the unstructured data. It will utilize the Item Response Theory model to
measure the privacy leaks in the messages and text that is being posted by the users of the online social
networking sites.
Intrusion Detection System (IDS) is meant to be a software application which monitors the network or system activities and finds if any malicious operations occur. Tremendous growth and usage of internet raises concerns about how to protect and communicate the digital information in a safe manner. Nowadays, hackers use different types of attacks for getting the valuable information. Many intrusion detection techniques, methods and algorithms help to detect these attacks. This main objective of this paper
is to provide a complete study about the definition of intrusion detection, history, life cycle, types of intrusion detection methods, types of attacks, different tools and techniques, research needs, challenges and
applications.
Understanding Networked Scholars: Experiences and practices in online social ...George Veletsianos
Slides from an invited talk given to the The 4th International Conference on E-learning and Distance Education located in Riyadh, Kingdom of Saudi Arabia: Online journals, online forums, and social media such as Facebook, Twitter, and YouTube are an integral part of open and digital scholarship, which is often seen as a major breakthrough in radically rethinking the ways in which knowledge is created and shared. In this presentation I situate networked practices in open/digital scholarship and explain what scholars and professors do online, and, why they do the things that the do. I conclude by describing 3 themes pervasive in scholarly networks: identify networks, networks of conflict, and networks of disclosure.
Πώς η περαιτέρω χαλάρωση του δημοσιονομικού στόχου θα μπορούσε δυνητικά να οδηγήσει σε αύξηση του ΑΕΠ αλλά και σε βελτίωση των βασικών δημοσιονομικών μεγεθών μεσομακροπρόθεσμα
Is fiscal policy effective in Brazil? An empirical analysisFGV Brazil
The main goal of this paper is to determine the effectiveness of fiscal policy in Brazil. With a sample from 1997 to 2014, we are not able to obtain the relevant impact of fiscal stimuli on output, even when altering both the methodology and the model specifications.
Good governance is essential for economic development as it enhances the effectiveness of economic policies undertaken by the government. The aim of this paper is to study the relationship between governance and economic growth in Africa. Using the World Bank governance indicators we construct a composite index to resume all the indicators in one variable that will be used to measure the impact of governance on growth. The main result of this study is that a change in the governance index of a unit is likely to produce an increase of 1.7% in real GDP. This result seems to be extremely important considering the shortage of financial resources in Africa. Improving governance seems to be the best and the less expensive way the boost economic growth. Thus, African countries need to strengthen their economic efficiency by promoting results-based fiscal management, improving their doing business environment and investing in education to improve the quality of human factor.
Fiscal deficit measures the incremental amounts that governments are required to borrow in order to finance their budget shortfalls. The concept has gained significance in recent times with the IMF imposing strict restrictions and monitoring of the levels of fiscal deficit that economies can run if they have taken support or are going to request support from the IMF. India too started to monitor Fiscal Deficit after it had to solicit support from the IMF to resolve the balance of payment crisis of 1991. This study traces the major changes in the India’s fiscal policy since 1980-81 through the country’s balance of payments crisis of 1991, the post economic liberalisation and high growth period, the introduction of FRBM Act in 2003, adjustment to the global financial crisis of 2008 and the recent post-crisis changes to return to a path of fiscal consolidation The study found that from 1980-81 to 2002-03 the periods of crisis led to the burgeoning of the deficit to unsustainable levels and prompted the government to introduce and adopt economic reforms to ensure that the deficit stood at more reasonable levels. However since 2003-04 the government has been more proactive and has undertaken fiscal policy reforms to ensure a steady reduction in fiscal deficit as a percentage of GDP leading to a more resilient economy.
Assessing the Effects of Tax Elasticity on Government SpendingDr. Amarjeet Singh
This paper assesses the effects of Tax elasticity on
Government Spending state wise from 2001-2010 for five
major states in terms of population. OLS Regression model is
used where the relationships are assumed to be linear. The
variables used in the regression model are: Gt = the
government spending at the state level, the dependent
variable Yt = the Gross Domestic Product (GDP) of the state
Ct = the central assistance to the state , Et = the elasticity
variable, The subscript ‘t’ refers to the corresponding year of
analysis and b0, b1, b2, b3, b4, b5 are regression coefficients. In most of the cases, elasticity bore a positive and significant
relation to the level of government spending except in the case
of Bihar, where the coefficient was negative and insignificant.
An empirical assessment of fiscal sustainability in south africa
1. Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.5, No.23, 2014
1
An Empirical Assessment of Fiscal Sustainability in South Africa
Allexander Muzenda
Department of Research and Publications, Regenesys Business School; South Africa
E-mail of corresponding author:alexmuzenda02@gmail.com
Abstract
The aim of this study was to empirically analyse whether the government maintained its public debt position on
a sustainable path during the period 1990-2013. Following diagnostic evaluation of unit root and cointegration
properties of the time series data, a fiscal reaction function was estimated to examine whether the government’s
fiscal policies were consistent with the intertemporal government budget constraint. A typical three-variable
framework of the Vector Error Correction Model (VECM) was used in E-views. The computed results confirm
that the government maintained a sustainable fiscal policy during the period under review by adjusting the
primary deficit or surplus in response to variations in its debt positions.
Keywords: Fiscal sustainability, public debt, primary balance, intertemporal budget constraint
1.Introduction
Fiscal policy remains an integral instrument achieving broad economic objectives across the globe. The modus
in which a government responds to its debt positions affects the stability of the economy; which further translates
into public debt trends. With protracted surges in government expenditure positions in most emerging economies,
fiscal sustainability analysis remains very important to ensure macroeconomic stability (Budina & van
Wijnbergen, 2007). Following Giammarioli et al., (2007), several methods can be used to assess fiscal
sustainability. According Stoica & Leonte (2011), the broadly applied method involves examining if the
government behaves in line with the present value borrowing constraint (PVBC). Therefore, a government
is deemed fiscally sustainable if the present value of future revenues flows exceeds the value of outstanding
(Schick, 2005).
In attempts to influence the direction of the economy through manipulation of taxes and spending, fiscal
authorities face three possible fiscal policy stances; neutrality, expansionary and contractionary positions
(Abdulla, Mustafa & Dahalan, 2012). A fiscal stance improves sustainability only if it fulfills the government’s
intertemporal budget constraint. The choice of fiscal policy stance reflects the modus in which the government
adjusts its debt levels. According to De Mello (2005), the intertemporal budget constraint (IBC) requires that a
government should respond to increases in public debt by making appropriate adjustments of primary balance.
Bohn (2007) stresses that such an adjustment process characterizes an error correction mechanism whereby the
increase in debt-to-GDP ratio should be responded to by improving the primary balance to capture or reverse the
increase in debt-to-GDP ratio.
The objective of this paper was to analyse how the South African government reacted to its debt
position during the period 1990-2013. The paper is organised as follows: Section 2 reviews literature and
provides a theoretical framework on fiscal sustainability. Section 3 specifies the econometric methodology and
estimation method. Section 4 presents, analyses and interprets the empirical findings; while Section 5 provides
conclusion and recommendations.
2. Literature Review and Theoretical Framework
Although numerous studies on fiscal sustainability primarily focused on industrial economies (Buiter, 1985 and
Blanchard, 1990); recently studies have shifted the focus towards emerging market economies. Some studies that
have concentrated on emerging economies include Chalk & Hemming (2000), Mendoza (2003) and Izquierdo &
Panizza (2003). Theoretically, fiscal sustainability is defined from either static or inter-temporal budget
constraints dimensions (Abdulla, Mustafa & Dahalan, 2012). The static budget constraint is satisfied only if the
public sector is able to finance its current expenditure with its revenue and new borrowing, and meet its maturing
liabilities. Similarly, the inter-temporal budget constraint is formulated based on the solvency criteria; which
require that the present discounted value of future primary budget balances should at least be equal to the value
of the outstanding stock of debt (Akyiiz, 2007). On contrary, Akyiiz (2007) criticizes the analysis of
sustainability based on solvency concept; indicating that the concept does not impose specific constraints on debt
at particular points in time. Schick (2005) further elaborates that applying the solvency condition is difficult due
to lack of comprehensive balance sheets that capture all assets and liabilities.
In light of the nexus between solvency and stability (Schick, 2005); numerous methods have been
applied by previous studies to assess fiscal sustainability. For example, Abdulla, Mustafa & Dahalan (2012) used
the VAR approach; while Goyal, Khundrakpam & Ray (2004) used the cointegration methodology. Furthermore,
Lusinyan & Thornton (2009) used unit root and cointegration test techniques to real revenue and spending data;
2. Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.5, No.23, 2014
2
and Tshiswaka-Kashalala (2006) used the econometric approach to analyse fiscal policy sustainability. Telatar,
Bolatoglu & Telatar (2004) applied Bohn’s (1998) within the framework of Bayesian Gibbs sampling simulation
to observe periodic changes in Turkish government fiscal behaviour. Oyekele & Ajilore (2014) employed an
error correction approach; and Deyshappriya (2012) used the multiple OLS regression technique to analyze
whether or not governments had violated the intertemporal budget constraints. According to Cunddington (1996),
fiscal sustainability analysis; whether based on either the basic accounting framework or present value constraint
(PVC) approach, begins with analyzing the intertemporal budget constraint (IBC) of the government specified in
baseline nominal terms as:
tttttt ZGMMBiB −+−++= −− 11)1( ----------------------- (1)
where 1−tB denotes the stock of public debt at end of period t-1; Mt-1 symbolizes the monetary base at the end of
period t-1; Gt represents government spending during period t; Zt denotes total revenues during period t; and i
represents the (constant) interest rate between period t-1 and t. To derive a true indicator of fiscal sustainability,
the government IBC is computed for period t+1; solve for bt and substitute the resulting expression into
~
tb to
obtain 1
~
−tb as a function of t+1; period t variables and the initial debt stock bt-1. Repeating the procedure yields:
∑
=
+−+
+
+
+−
+
+
=+
+
+ n
s
~
m
tzst
~
d
s
r
θ
t
~
b
θ
r
nt
~
b
n
r
θ
0
11
1
1
1
1
1
1
------------------------- (2)
For large samples, the intertemporal solvency requires that:
0
1
1
lim =+
+
+
∞→
nt
~
b
n
r
θ
n
------------------------ (3)
To further derive an indicator that makes the definition of a sustainable fiscal path operational; the permanent
primary deficit
~
*
)( td is defined as the fixed level of primary deficit whose present discounted value at period t
equals the present discounted value of actual primary deficits:
st
~
s
s
t
~
s
s
d
r
θ
d
r
θ
+
∞
=
∗∞
=
∑∑
+
+
=
+
+
00
1
1
1
1
--------------------- (4)
Hence; st
s
s
t d
rr
r
d +
+
∞
=
∗
∑
+
+
+
−
=
~
1
0
~
1
1
1
θθ
---------------------- (5)
Combining equations (4) and (5) yields:
1
~
11
~
−
+
−
=
+
−
=
∗
− tb
rr
td
θ
θ
θ
θ
---------------------- (6)
Equation (6) indicates that if fiscal policy is sustainable, the permanent primary surplus (-
∗
t
~
d ) must equal the
effective real interest payments on initial stock of government debt. Resultantly, the true indicator of fiscal
sustainability ( ∗
tϕ ) can be formulated as:
∗
+−
+
−
≡∗
t
~
dt
~
b
θ
θr
t 1
1
ϕ ---------------------- (7)
Fiscal policy in current time period t is deemed sustainable only if 0=∗
tϕ . When 0>∗
tϕ , the planned path of
( t
~
z,t
~
g ) violates the government intertemporal budget constraint. Conversely, if 0<∗
tϕ , the planned path of
( t
~
z,t
~
g ) does not violate the government intertemporal budget constraint; hence the fiscal policy is deemed
sustainable.
3. Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.5, No.23, 2014
3
3. Methodology and Estimation Procedure
3.1 Data
Time series quarterly data on primary balance-to-GDP ratio and debt-to-GDP ratio for the period 1990-2013 was
used. The output gap variable was computed as the percentage difference between actual GDP and potential
GDP; upon which data on potential GDP was generated using the Hodrick-Prescott filter using E-views prior to
econometric estimation of results.
3.2 Stationarity Tests
The ADF approach was used to perform unit root tests of variables in levels and first difference, with both
intercept and trend. The tests were undertaken to examine whether the difference between non-stationary series
becomes stationary when the same variables move together in the long run, even though they may drift apart in
the short run. The ADF tests were applied on the rationale that they perform satisfactorily even for small samples.
The tests were performed following the equation:
i
p
j
jijii uyayy +∆++=∆ ∑
−
=
−−
1
1
11 δβ ------------------------------- (8)
where: iu represents a pure white noise error term, 21 −−− −=∆ iiji yyy and p denotes the class of autoregression;
the null hypothesis being 0=δ . The ADF tests with trend variable were performed based on the regression
below:
i
p
j
jijii uyayty +∆+++=∆ ∑
−
=
−−
1
1
121 δββ ------------------------ (9)
where: t represents the time or trend variable; with the null hypothesis being 0=δ .
3.3 Cointegration Tests
Following analysis of the order of integration, the study proceeded further to test for the presence of
cointegration among variables using the Johansen (1988) maximum likelihood cointegration approach. The
maximum eigenvalue (λ max) method was applied to detect existence of cointegrating vectors based on the
premise that the technique is more reliable in small samples (Hamilton, 1994).
+−−= 1rλ1logTmaxλ ------------------------- (10);
Where: the null hypothesis r ≤ g cointegrating vectors, with (g = 0, 1, 2, 3, ---) is tested against the alternative
hypothesis r = g + 1.
3.4 Estimation Procedure
The Vector Error Correction Model (VECM) was used to test for sustainability of fiscal policy in South Africa
during the period 1990:1-2013:4. Denoting primary balance-to-GDP ratio, debt-to-GDP ratio and output gap by
(B/Y), (D/Y) and Y_gap; respectively, the behaviour of government was analysed using a fiscal reaction
function estimated following integration of a system of some equations:
ttYDYB εα ++= −1// --------------------------- (11)
In consideration of the existence of government inertia in fiscal policy reaction, a lag of the B/Y ratio
was added to equation (11) above. In taking consideration of the government’s effort to pursue short-run demand
stabilisation (De Mello, 2005), output gap was added to the equation as an exogenous variable; yielding the
fiscal reaction function as:
ttttt GapYYDYBYB εββββ ++++= −− _/// 413121 -------------------------- (12)
Given the nature of the Vector Error Correction (VEC) model, estimation was undertaken as a model containing
two equations; (11) and (12).
( ) ( ) ( )[ ] ( ) ( ) ( ) 11tt41t121t11131t121t1211t ε_/∆/∆//π/∆ ++++−−+= −−−− GapYYDYBDYYBYB φϕϕθθα --(13)
( ) ( ) ( )[ ] ( ) ( ) ( ) 21tt41t221t21131t121t1321t ε_/∆/∆//π/∆ ++++−−+= −−−− GapYYDYBYDYBYD φϕϕθθα -(14)
where: ( ) ( ) 131t121t // θθ −− −− YDYB in (13) and (14) denotes the deviation from long run relationship given by
4. Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.5, No.23, 2014
4
the formulation:
( ) ( ) 131121 // θθ += −− tt YDYB --------------------- (15)
The output gap was included in the short-run dynamics of equations (14) and (15) to capture the
probability of fiscal policy reaction to business cycles. The parameter 12π represents the error correction term,
which captures the fiscal reaction to the D/Y. Thus, the error correction term captures the response of primary
balance-to-GDP ratio to deviations from the long-run equilibrium path captured in equation (15). The VECM
approach estimated the fiscal reaction function as a model containing equations (13) and (14); yielding:
kttjt
n
jt
jit
k
it
itt cZVVV εξϖ ++Φ+∆+=∆ −
=
−
=
− ∑∑1 ------------------------ (16)
where: Vt represents a 3x1 vector containing I(1) endogenous variables (primary balance-to-GDP ratio, D/Y ratio
and a constant); Zt represents a 1x1 vector containing an I(0) exogenous variable (output gap); ξ i denotes 2x2
coefficient matrices; Φj represents a 2x1 vector containing coefficients of the exogenous variable; ct is a vector
containing constants and εkt denotes IDD error terms. The parameter ϖ was decomposed into τ and ϑ/
matrices:
[ ]
−−
== −
−
−−
1
/
/
1 1
1
1312
12
11
1
/
1 t
t
tt YD
YB
VV ϑϑ
τ
τ
ϑτϖ -------------------------- (17)
where: τ denotes a 2x1 matrix of 2 variables and 1 cointegrating relationship that contains the long-run
equilibrium adjustment parameter; and ϑ/
represents a 1x3 matrix containing long run parameters, including a
constant.
4. Results and Discussion
This section provides results which provide evidence on how the government historically reacted to its debt
position, and determine whether or not the government’s reaction enhanced fiscal policy sustainability. Unit root
and cointegration tests were performed prior to estimation of the fiscal reaction function.
Table 1: Unit Root Test Results for B/Y ratio and D/Y ratio
Data Series
With Intercept and Trend
Level First Difference
B/Y ratio
D/Y ratio
-6.89∗∗∗
-1.74
-17.26∗∗∗
-6.41∗∗
∗∗∗;∗∗; ∗
denote significance at 1 percent, 5 percent and 10 percent levels; respectively.
The ADF unit root tests were performed at both level and first difference; upon which the optimal lag
selection was based on the Akaike Information Criterion. The integration properties of the variables were
investigated in order to avoid the problem of spurious regression. The results indicate that B/Y ratio is an I(0)
variable at 1 percent level, while the D/Y ratio is an I(1) variable at 5 percent level. The stationarity test results
for the debt-to-GDP ratio suggest that the behaviour of the respective variable may be close to a random walk.
The cointegrating relationship between variables was tested using Johansen eigenvalues and L.R. statistics.
Table 2: Johansen Cointegration Test for Linear Deterministic Trend – Lag Interval: 1 to 1
Eigenvalue and L.R. Test Statistics
H0
H1
r = 0
r = 1
r ≤ 1
r = 2
Eigenvalue
L.R. statistic
0.206212
24.73745∗∗
0.025059
2.562173
∗(∗∗)
denotes rejection of the null hypothesis at 5% (1%) significance level
Critical Values
1% Sig. level
5% Sig. level
21.04
16.41
6.75
3.79
The eigenvalue and the likelihood ratio (LR) test statistics confirm existence of one cointegrating
relationship at 1 percent level of significance. Given the presence of cointegrating equations, the estimates of the
fiscal reaction function were computed based on the VEC model.
5. Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.5, No.23, 2014
5
Table 3: Vector Error Correction Model Results
Cointegrating Equation:
log(B/Y ratio (-1))
log(D/Y ratio (-1))
Constant
1
-0.237916
(-2.31988)
7.676438
Error Correction Equation: dlog(B/Y ratio) dlog(D/Y ratio)
Cointegrating Equation
dlog(B/Y ratio (-1))
dlog(D/Y ratio (-1))
Constant
Y_Gap
-0.585644
(-4.73821)
-0.283413
(-2.86525)
-0.745779
(-1.45050)
-0.036159
(-0.06460)
0.362281
(0.95940)
0.021028
(0.80036)
-0.023708
(-1.16606)
0.353195
(3.34201)
0.082772
(0.71937)
-0.164161
(-2.11499)
Adj. R-squared
Sum sq. resids
S.E. equation
F-statistic
0.437722
2534.446
5.366612
18.90504
0.170036
107.0804
1.103097
5.712041
The results on the long run component of the cointegrating equation indicate that for every 1 percent
increase in the D/Y ratio, the B/Y ratio increases by nearly 0.24 percent. The minus sign in front of the parameter
of long run component of the cointegrating equation depicts a positive relationship between the variable to which
the parameter relates and the variable on which the vector is normalized. Furthermore, the results for the B/Y
ratio equation reveal that marginally above half of the deviation from the long run equilibrium is corrected in the
first quarter after the deviation occurred. This is confirmed by the estimated fiscal response to deviations from
the long-run equilibrium path equal to -0.59.
Though statistically insignificant, the positive coefficient of the Y_Gap in the short run dynamics of the
B/Y ratio designates countercyclical behaviour by the government. Conversely, the output gap coefficient in the
short run dynamics of the D/Y ratio suggests presence of differentiated countercyclical fiscal policy. This
implies that a negative Y_Gap increases the adjustment in D/Y ratio; while a positive output gap lowers the
adjustment. Consistent with findings from previous similar studies by Tshiswaka-Kashalala (2006), Lusinyan &
Thornton (2009), Burger, Stuart, Jooste & Cuevas (2011) and Calitz, Du Plessis & Siebrits (2013), results from
this study indicate that the government’s fiscal policy was sustainable during 1990-2013.
5. Conclusion and Recommendations
5.1 Conclusion
The objective of this study was to examine how the South African government reacted to its debt position within
the context of the government intertemporal budget constraint. Using quarterly time series data on B/Y ratio and
D/Y ratio, the sample period for the study spanned from 1990 to 2013. Prior to empirical investigation of the
sustainability position of the country’s fiscal path, stationarity and cointegration properties of time series data
were investigated based on the ADF and Johansen cointegration procedures; respectively. Given the evidence of
both stationarity and cointegration between variables, the government’s reaction to its historical debt positions
was analysed using the Vector Error Correction model. The computed results indicated that fiscal policies
remained sustainable during the sample period, hence the government behaved in a fiscally sustainable manner.
5.2 Recommendations
Fiscal policy remains an effective tool for achieving growth and employment; and reducing poverty and income
distribution inequalities. This enhances macroeconomic performance in the economy. Given the continuous
rising unemployment, poverty and income distribution inequalities in the economy, the country’s fiscal policy
needs to be formulated and implemented in such a way that it eloquently promotes inclusive growth and
equitable income distribution. From the domestic economy viewpoint, the government total debt in relation to
the domestic bond market remains high. Rising public D/Y ratios entail the risk of increasing pressure on
sovereign financing capacity, creditworthiness and country ratings. In that respect, fiscal consolidation is
required in the future coming years to put public debt on a declining path and keep the path stable in both the
6. Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.5, No.23, 2014
6
medium term and long run periods.
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