Assessing Multiplier Effects of Public Expenditures on Economic Growth in Nepal: SVAR Model Analysis

Raghu Bir Bista; Kiran Prasad Sankhi

doi:10.35877/454RI.qems755

Authors

Raghu Bir Bista Department of Economics, Tribhuvan University, Kathmandu, Nepal https://orcid.org/0000-0002-4062-1763
Kiran Prasad Sankhi Nepal Bank Limited, Kathamandu, Nepal

DOI:

https://doi.org/10.35877/454RI.qems755

Keywords:

public expenditure, economic growth, multiplier effect, SVAR, Nepal

Abstract

This paper assesses the multiplier effects of public expenditures on economic growth in Nepal, covering time series data sets of public expenditures and economic growth from 1974-75 to 2018-19 by using the SVAR model. As a result of the SVAR model, the multiplier effect of public expenditure, recurrent expenditure, and capital expenditure is positive for economic growth. In a result, the multiplier effect of recurrent expenditure is found to be more promising than capital expenditure for economic growth in the short run, but in the long run, it is lower. Similarly, the multiplier coefficient value of capital expenditure is lower in the short run. This is probably due to leakages in the economy, corruption and improper management of development funds, seasonal expenditure trends, and poor management of development projects. Therefore, the government should improve the efficiency of public expenditure and the ratio of capital expenditure and private investment to improve the higher multiplier variable in the long run.

References

Adelino, M., Cunha, I., & Ferreira, M. A. (2017). The economic effects of public financing: Evidence from municipal bond ratings recalibration. The Review of Financial Studies, 30(9), 3223-3268.

Archibald, G. C. (1967). Regional multiplier effects in the UK. Oxford Economic Papers, 19(1), 22-45.

Batini, N., Eyraud, L., Forni, L., & Weber, A. (2014). Fiscal multipliers: Size, determinants, and use in macroeconomic projections. Washington, USA: International Monetary Fund.

Baxter, M., & King, R. G. (1993). Fiscal Policy in General Equilibrium. The American Economic Review, 83(3), 315–334.

Bhusal, T.P. (2014). Government spending and economic growth in Nepal: An empirical analysis. Nepalese Journal of Economic Studies, 1(1), 52-61.

Bista, R. (2016). Economics of Nepal. Kathmnadu: New Hirabooks

Bista, R. (2021). Economics of Nepal. Kathmnadu: New Hirabooks

Bose, S., & Bhanumurthy, N. R. (2015). Fiscal Multipliers for India. Margin: The Journal of Applied Economic Research, 9(4), 379–401. https://doi.org/10.1177/0973801015598585

Chaudhary, S. K. (2010). Public expenditure and economic growth in Nepal. Economic Literature, IX, 96-104.

De Castro, F. (2003). Non-Keynesian effects of public expenditure in Spain. Applied Economics Letters, 10(10), 651-655.

Diulo, E.A.(1983). Macroeconomic Theory. Singapore: Schaum’s Outline Series

Friedman, M. (1980) Free to choose. New york: Harcourt

Galí, J., López-Salido, J. D., & Vallés, J. (2007). Understanding the Effects of Government Spending on Consumption. Journal of the European Economic Association, 5(1), 227–270. https://doi.org/10.1162/JEEA.2007.5.1.227

Greene, W.H. (1990). Econometric Analysis. US: Pearson Education

Gupta, S., & Verhoeven, M. (2001). The efficiency of government expenditure: Experiences from Africa. Journal of Policy Modeling, 23(4), 433–467. https://doi.org/10.1016/S0161-8938(00)00036-3

Haavelmo, T. (1945). Multiplier effects of a balanced budget. Econometrica: Journal of the Econometric Society, 311-318.

Jain, R., & Kumar, P. (2013). Size of Government Expenditure Multipliers in India: A Structural VAR Analysis. RBI Working Paper Series, 2013(07). Retrieved from https://www.rbi.org.in/scripts/PublicationsView.aspx?Id=15369

Kharel, R. S. (2012). Modelling and forecasting fiscal policy and economic growth in Nepal. NRB Economic Review, 24(1), 1-15. Retrieved from http://www.nrb.org.np/ecorev/pdffiles/vol24-1_art1.pdf

Kunwar, K. B. (2019). Impact of Government Expenditure in Economic Growth of Nepal: ARDL Approach. Contemporary Research: An Interdisciplinary Academic Journal, 3(1), 33–40. (Nepal). https://doi.org/10.3126/craiaj.v3i1.27488

Lekhi, R. K., & Singh, J. (2015). Public Finance. Noida, India: Kalyani Publilshers.

Pérez-Montiel, J. (2020). Government Public Investment Dynamic Multiplier Effects: An Empirical Analysis for Spain. Available at SSRN 3634081.

Popa, I., & Codreanu, D. (2010, February 15). Fiscal Policy and its role in ensuring economic stability [MPRA Paper]. Retrieved February 9, 2021, from https://mpra.ub.uni-muenchen.de/20820/

Smith, A. (1776). The Wealth of Nation. London: W. Strahan and T. Cadell

Yen, S. H., Ong, W. L., & Ooi, K. P. (2015). Income and employment multiplier effects of the Malaysian higher education sector. Margin: The Journal of Applied Economic Research, 9(1), 61-91.

Yoshida, M., & Kenmochi, T. (2011). Multiplier effects of public services in a two-sector model of monopolistic competition. The Japanese Economic Review, 62(2), 272-288.