Economic Uncertainty and Impact of Governments’ Spending on Economic Growth: An Empirical Study of Emerging Market Economies *

Abstract

The COVID-19-led economic crisis has rekindled scholarly interest in the relationship between government spending and economic growth. Further, there is an emerging realm of empirical literature that focuses on the dynamics of this relationship during times of uncertainty. Against this backdrop, this study investigates the effect of government expenditure on economic growth during economic uncertainty and the role of economic confidence in the transmission mechanism of policy shocks utilizing a panel generalized method of moments (GMM) framework for 13 select emerging market economies (EMEs). The findings suggest that the beneficial impact of government spending during economic uncertainty is not significantly different from regular times; however, its effectiveness is enhanced during contractionary periods. Government spending, on the other hand, does not have a statistically significant effect during expansionary phases. Furthermore, unanticipated government spending boosts economic confidence, especially during contractionary phases. Governments in EMEs should implement countercyclical fiscal policies selectively to stimulate aggregate demand and facilitate economic recovery, prioritizing targeted spending in confidence-building initiatives and key sectors. Spending in high multiplier sectors during contractionary periods can boost economic activity and speed recovery, fostering stability and growth amidst uncertain economic conditions.

JEL Classification E32, H30, H32

Keywords

Government spending shocks economic uncertainty economic confidence generalized method of moments emerging market economies

Get full access to this article

View all access options for this article.

References

Aastveit

K. A.

, Natvik

G. J.

, & Sola

(2013). Economic uncertainty and the effectiveness of monetary policy. Journal of International Money and Finance , 76, 50–67. https://doi.org/10.1016/j.jimonfin.2017.05.003

Ahmad

, & Qayyum

(2008). Effect of government spending and macro-economic uncertainty on private investment in services sector: Evidence from Pakistan. European Journal of Economics, Finance and Administrative Sciences , 11, 84–96.

Alexiou

(2009). Government spending and economic growth: Econometric evidence from southeastern Europe. Journal of Economic and Social Research , 11(1), 1–16.

Al-Fawwaz

T. M.

(2016). The impact of government expenditures on economic growth in Jordan (1980–2013). International Business Research , 9(1), 99–105. https://doi.org/10.5539/ibr.v9n1p9910.5539/ibr.v9n1p99

Alloza

(2017). Is fiscal policy more effective in uncertain times or during recessions? [Banco De Espana Working Paper No. 1730]. https://doi.org/10.2139/ssrn.3024538

Altig

, Baker

, Barrero

J. M.

, Bloom

, Bunn

, Chen

, Davis

S. J.

, Leather

, Meyer

, Mihaylov

, Mizen

, Parker

, Renault

, Smietanka

, & Thwaites

(2020). Economic uncertainty before and during the COVID-19 pandemic. Journal of Public Economics , 191, 104274. https://doi.org/10.1016/j.jpubeco.2020.104274

Andini

(2024). The influence of fiscal policy on economic growth. Journal of Economics, Management and Finance , 3(1), 1–9.

Arcabic

, & Cover

J. P.

(2016). Uncertainty and the effectiveness of fiscal policy [EFZG Working Paper Series 1611]. Faculty of Economics and Business, University of Zagreb.

Auerbach.

A. J.

, & Gorodnichenko

(2011). Fiscal multipliers in recession and expansion [NBER Working Paper No. 17447]. National Bureau of Economic Research. https://ssrn.com/abstract=2000492

10.

Auerbach.

A. J.

, & Gorodnichenko

(2012). Measuring the output responses to fiscal policy. American Economic Journal: Economic Policy , 4(2), 1–27. https://doi.org/10.1257/pol.4.2.1

11.

Bachmann

, & Sims

E. R.

(2012). Confidence and the transmission of government spending shocks. Journal of Monetary Economics , 59(3), 235–249. https://doi.org/10.1016/j.jmoneco.2012.02.005

12.

Baker

S. R.

, & Bloom

(2013). Does uncertainty reduce growth? Using disasters as natural experiments [CEP Discussion Papers No. 1243]. Centre for Economic Performance, London School of Economics and Political Science.

13.

Baker

S. R.

, Bloom

, & Davis

S. J.

(2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics , 131 (4), 1593–1636.

14.

Beaudry

, & Portier

(2006). Stock prices, news, and economic fluctuations. American Economic Review , 96(4), 1293–1307. https://doi.org/10.1257/aer.96.4.1293

15.

Berg

T. O.

(2019). Business uncertainty and the effectiveness of fiscal policy in Germany. Macroeconomic Dynamics , 23(4), 1442–1470. https://doi.org/10.1017/S1365100517000281

16.

Bloom

(2009). The impact of uncertainty shocks. Econometrica , 77(3), 623–685. https://doi.org/10.3982/ECTA6248

17.

Bloom

, Floetotto

, Jaimovich

, Eksten

S. I.

, & Terry

(2018). Really uncertain business cycles. Econometrica , 86(3), 1031–1065. https://doi.org/10.3982/ECTA10927

18.

Campodonico

, Cassinelli

, & Mesones

(2014). The impact of public expenditures in education, health, and infrastructure on economic growth and income distribution in Peru [IDB Working Paper Series No. 490]. Fiscal and Municipal Management Division, Inter-American Development Bank, Washington D.C.

19.

Connolly

, & Li

(2016). Government spending and economic growth in the OECD countries. Journal of Economic Policy Reform , 19(4), 386–395. https://doi.org/10.1080/17487870.2016.1213168

20.

Danladi

J. D.

, Akomolafem

K. J.

, Olarinde

, & Anyadiegwu

N. L.

(2015). Government expenditure and its implication for economic growth: Evidence from Nigeria. Journal of Economics and Sustainable Development , 6(18), 142–150.

21.

Fournier

J. M.

(2016). The positive effect of public investment on potential growth [OECD Economics Department Working Papers, No. 1347]. OECD Publishing. https://doi.org/10.1787/15e400d4-en

22.

Gbohoui

(2021). Uncertainty and public investment multipliers: The role of economic confidence [IMF Working Paper 21/272 ]. International Monetary Fund.

23.

Guney

(2019). Macroeconomic uncertainty and private investment: The case of Poland, International Journal of Economic and Administrative Studies , 22, 93–106. https://doi.org/10.18092/ulikidince.404607

24.

Hamdi

, & Sbia

(2013). Dynamic relationship between oil revenues, government spending and economic growth in an oil-dependent economy. Economic Modelling , 35, 118–125. https://doi.org/10.1016/j.econmod.2013.06.043

25.

Jerow

, & Wolff

(2022). Fiscal policy and uncertainty. Journal of Economic Dynamics and Control , 145, 104559. https://doi.org/10.1016/j.jedc.2022.104559

26.

Katrakilidis

, & Tsaliki

(2009). Further evidence on the causal relationship between government spending and economic growth: The case of Greece for 1958–2004. Acta Oeconomica , 59(1), 57–78. https://doi.org/10.1556/aoecon.59.2009.1.3

27.

Kraay

(2012). How large is the government spending multiplier? Evidence from World Bank lending. The Quarterly Journal of Economics , 127(2), 829–887.

28.

Kuo

C. H.

, & Miyamoto

(2023). Public investment and labor market flexibility. Economics Bulletin , 43(2), 1122–1132.

29.

Ludvigson

S. C.

(2004). Consumer confidence and consumer spending. Journal of Economic Perspectives , 18(2), 29–50. https://doi.org/10.1257/0895330041371222

30.

Moore

(2017). Measuring economic uncertainty and its effects. Economic Record , 93(303), 550–575. https://doi.org/10.1111/1475-4932.12356

31.

Nurlina

(2015). The effect of government expenditures on Indonesian economic growth. Journal of Economics, Business, and Accountancy Ventura , 18(1), 1–14. https://doi.org/10.14414/jebav.v18i1.377

32.

Oladele

M. F.

, Mah

, & Mongale.

(2017). The role of government spending on economic growth in a developing country. Risk Governance and Control: Financial Markets and Institutions , 7(2), 140–146. https://doi.org/10.22495/rgcv7i2c1p2

33.

Qazizada

, & Stockhammer

(2014). Government spending multipliers in contraction and expansion. International Review of Applied Economics , 29(2), 238–258. https://doi.org/10.1080/02692171.2014.983053

34.

Ramey

V. A.

, & Zubairy

(2018). Government spending multipliers in good times and in bad: Evidence from U.S. historical data. Journal of Political Economy , 126(2), 850–901. https://doi.org/10.1086/696277

35.

Redl

(2018). Macroeconomic uncertainty in South Africa. South African Journal of Economics , 86(3), 361–380. https://doi.org/10.1111/saje.12198

36.

Reserve Bank of India. (2022). Report on currency and finance 2021–22 . https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RCF202122_FULLB5D854DD796948889FF5099C22CD6893.PDF

37.

Rubaj

(2023). Emerging markets as key drivers of the global economy. European Research Studies Journal , 26 (4), 431–445. https://doi.org/10.35808/ersj/3294

38.

Schouame

E. S.

, Okobalemba

, & Tamba

(2023). Effects of government spending on productive capacity. Revue Economie, Gestion et Societe , 1(39). https://doi.org/10.48382/IMIST.PRSM/regs-v1i39.42382

39.

Serven

(2003). Real-exchange-rate uncertainty and private investment in LDCS. The Review of Economics and Statistics , 85 (1), 212–218. http://www.jstor.org/stable/3211635

40.

Wang

S. L.

(2021). Fiscal stimulus in a high-debt economy? A DSGE analysis. Economic Modelling , 98, 118–135. https://doi.org/10.1016/j.econmod.2021.02.009