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Islamic Economics and Finance Research Group

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Universiti Kebangsaan Malaysia, Bangi 43600, Selangor, Malaysia Fax: 603-89215789 http://www.ukm.my/ekonis E-mail: ekonis@pkrisc.cc.ukm.my
Working Paper in Islamic Economics and Finance No. 0402 Searching for Saving Effects of Fiscal Policy: Evidence from Muslim Countries Abd. Ghafar b. Ismail, PhD a Muhammad Zilal Hamzah, MPhil b Islamic Economics and Finance Research Group School of Economics Universiti Kebangsaan Malaysia Bangi, 43600 Selangor D.E. Malaysia Fax: 603-8921 5760 e-mail: agibab@pkrisc.cc.ukm.my

July 2004 Paper to be presented at the 6 th Indonesia Regional Science Association International Conference, titled “Regional Development in Transition: Governance, Public Services, and Eco-tourism”, Jogjakarta, August 13-14, 2004

a b

Professor of banking and financial economics, Universiti Kebangsaan Malaysia Post-Graduate Student, Universiti Kebangsaan Malaysia and STIE Bisnis Indonesia-Jakarta

national saving. this paper investigates whether the fiscal policy has an effect on national saving in Muslim countries. the focus is only concentrated on interest rates. We will show that the response of national savings to fiscal policy are not limited to large fiscal contractions. consumption. We also find that. But. the size and significance of the interaction terms are again stronger during expansions than during contractions. Muslim countries . investment and economic growth.2 Abstract The studies on the effects of fiscal policy on the macroeconomic variables are well documented. high or rapidly growing public debt may appear to be a good predictor of those affects. H31 Keywords: fiscal policy. in Muslim countries. but also. Based on a panel data model. JEL classification: E21. E62.

and subsequently a large body of literature has evolved trying to find a rationale for the seemingly ‘perverse’ effects of fiscal consolidation. two propositions emerge. Giavazzi and Pagano (1990) show that fiscal consolidation can lead to improved expectations about long-term growth and followed by an increase rather than a reduction in current private sector spending. concentrates on factors affecting the success (i. play important role in explaining the outcome of fiscal consolidation. the government debt–GDP ratio is the important variable affecting private sector expectations. whereas the Ricardian Equivalence proposition states that large deficits have no real economic effects because household increase savings to offset anticipated future tax liabilities implicit in deficits. interest rates remain unchanged and budget deficits have no adverse macroeconomic consequences. However. First. Giavazzi. From the above theoretical literature. the international macroeconomic environment and exchange rate development (except the size and persistence of program). Then. and find evidence that national saving responds non-linearly to fiscal policy when a large and persistent consolidation is undertaken.e. Consequently. given that the theories have observationally equivalent implications in some respects. if the debt ratio is either near a critical value or grows at a rapid pace. under certain circumstances. The first.fiscal consolidation leads to an increase in national saving) or Ricardian effects on the economy. However. large government budget deficits crowd out real investment by raising interest rates. Elmendorf and Mankiw (1999) further report on the unresolved issue of whether budget deficits have Keynesian. reaching the goal of a permanent reduction in the government debt–GDP ratio) and failure of fiscal consolidation. The literature analyzing fiscal consolidation turnaround is divided into two major branches. as reported by Blanchard (1990). Neoclassical (i.3 1. Their findings show that. the level and growth rate of public debt.. Introduction The conventional macroeconomic theory proposes that. Sutherland (1997) and Perotti (1999). based on Alesina and Perotti (1995). a fiscal consolidation program does not lead to a rise in national saving: the private sector reacts to improved long-term prospects by dissaving more than the government . The second branch of literature concentrates on measuring the success of fiscal consolidations in terms of macroeconomic rather than fiscal outcomes. the observation on a rigorous turnaround in fiscal policy in the mid80s was at odds with conventional macroeconomic theory concerning the short-run economic effects of fiscal policy. the impact of budget deficits on national saving (and other macroeconomic variables) can be reversed. Japelli and Pagano (2000) further investigate the relationship between fiscal policy and national saving.e. Heylen and Everaert (2000) try to identify factors affecting fiscal consolidation and find that the composition of the program.

In other studies. Giavazzi. Second. Jappelli and Pagano (2000) find that in both industrial and developing countries. 1 . the non-linearity of the response is stronger for fiscal contractions than for expansions. non-linearities in the response national saving to fiscal policy are not limited to large fiscal contractions. we investigate the effects of government behaviour during fiscal episodes by concentrating on national saving.4 saving 1 . The savings are used to buy government bonds and private bonds. The utility u of the representative individual depends on his consumption in the working period c1 and on his consumption in the retirement period c2. the individual earns interest on the bonds and sells the bonds altogether. but there is no consensus about the sign of its effects on national savings. while it has a positive effect in less pronounced contractions. By looking into the national saving give us the advantage to compare our results directly with the prediction of the Ricardian equivalence proposition. regardless of its initial level.The utility function is: u = γ log c1 + δ log c2 (1) Perotti (1999) finds that the outcome of a consolidation is more likely to be expansionary when public debt is high or growing rapidly. An increase in taxes has no effect on national saving during large fiscal contractions. Individuals live for two periods. The above findings show that although fiscal consolidation is an important in macroeconomics. Drazen (1990) states that non-linear fiscal policy effects may depend on the size and persistence of the fiscal impulse. The proceeds are entirely consumed. so nothing is bequeathed. and also tend to occur in periods in which debt is accumulating rapidly. Meanwhile in the developing countries. we focus on individual saving decisions and resulting capital dynamics. In the industrial countries. The rest of the paper is organized in the following way: the next section explains the model used. In conducting this research in Muslim countries. the individual receives labor income. In a situation of unsustainable fiscal policy the private sector will only revise its expectations if the government gives a clear signal that it will permanently alter its course towards sound public finances. In the first period of life they work and in the second they are retired. data sources and estimation procedure. During the retirement period. During the working period. The empirical results are examined in the third section and in the fourth section will summarize the conclusions. The Model First. High or rapidly growing public debt does not appear to be a good predictor of non-linear effects. non-linear effects tend to be associated with large and persistent fiscal impulses. 2. which he partly consumes and partly saves.

The representative individual faces an intertemporal budget constraint. investment and government purchases.t)γw. Y=AKα (EN) β. The government levies a tax at the flat rate t on factor income and debt income T . As a consequence. the intertemporal budget constraint can be stated as: c 1 + [c2 / (1+(1 . It is assumed that labor efficiency is proportional to capital per worker E=K/N and is therefore endogenous for the economy. we look at the aggregate production function.t)w = c1 + s. Now we take a look at the dynamics of public debt. Net income in the working period is given by the net wage (1 . they do not enter the utility function. The budget deficit of this period adds up to the public debt of this period to give the public debt of the next period Dt+1 = D + B. Consequently. Net labor income minus consumption gives the savings of the representative young individual s = (1 . Note that the government fixes the deficit ratio to obtain: Dt+1 = D + bY (6) The interest rate r has to be paid on public debt D. Therefore the budget constraint in the first period of life is (1 .t)r)] = (1 . it is convenient to consider growth factors. we can deduce: Dt+1 + Kt+1 = (1 .t)δw. First. The aggregate savings of the working generation are given by S = sN.t)δw and w = βY/N to obtain: S = (1-t)βδY (3) Equation (3) represent the savings of the young generation that are used to finance public debt and private capital of the following period Dt+1 + Kt+1 = S.t)βδY (4) Now for further analysis. The government spends a given proportion of national income on goods and services G = gY with g = constant.t)r]s. Maximization of (1) under the restriction of (2) gives the consumption of a worker as c1 = (1 .t)w (2) The individual chooses present and future consumption so as to maximize utility subject to his budget constraint.t)w. Use s = (1. Labor efficiency E depends on the amount of knowledge accumulated which comes from learning-by-doing.t)w – c1 = (1 . In addition. The individual earns the net interest rate (1 . Here it is implicitly assumed that government purchases do not affect intertemporal allocation. the government borrows a specified fraction of national income B = bY with b = constant. δ > 0 and γ + δ = 1. so that public interest is given by rD. Accordingly. The aggregate production function can be simplified into: Y = AK (5) Output Y can be devoted to consumption.5 with γ > 0. So consumption in the retirement period is c2 = [1 +(1 .t)r on savings. It can be used for consumption in the working period and for savings s.

solve for Kt+1 . Then. in the steady state. divide by K. Finally divide numerator and denominator by K. so that the debt-capital ratio is constant.b)K + αD]/[K + αD]. Y* is potential output. Divide (4) by D to obtain Dt+1 /D = bY/D. Replace Y by AK and r by αA to get t = [(g . . Note that the tax and spending variable appear twice on the right-hand side of equation [1]. and then substitute x = D/K to obtain: 1 . r is the real short term interest rate. Take account of the functional relationships to see: bY + t(Y + rD) = gY + rD (7) The government fixes both the purchase ratio and the deficit ratio and has to accept interest payments on public debt. we can specify the saving equation as follows: (Sti/Yti) = α0i + α1i(Sti-1/Yti-1) + α2i[(Yti-Yti*)/ Yti*)] + α3i rti + β1i(Tti/Yti) + β2i dti(Tti/Yti) + γ1i(Gti/Yti) + γ2i dti(Gi/Yti) + uit (11) where S is national saving. (Y-Y*)/Y* is the output gap. Hence. From (7) we observe t = [(g . All variables apart from the real interest rate are scaled by potential GDP to avoid problems of heteroscedasticity.6 = t(Y +rD). As it is obvious from (5). we want to look at the growth factor of public debt. and uit are random shocks assumed to be distributed independently and identically with zero mean and a constant variance. The government budget constraint is B + T = G + rD. The country-specific constants α0ι (the fixed effects) are the only source of heterogeneity in this framework. to reach Dt+1 + Kt+1 = [(1+b-g)βδAK]/(1+αx). T is net taxes and G is government spending. and use x = D/K to obtain the growth factor of capital: Kt+1/K = {[(1 + b . Both variables are interacted with a dummy variable d which captures the episodes of large and persistent fiscal impulses reported in Table 1.b)Y + rD]/[Y + rD]. Both growth factors are constant if the debt-capital ratio is constant. public debt has to grow at the same rate as capital. output growth corresponds to capital growth. Then replace debt in the next period with the help of (6).t = (1 + b – g)/(1 + αx) (9) Further insert (5) and (9) into (4). By combining equations (3) and (10). Then replace output with the help of (5) and insert x = D/K for the debt-capital ratio: Dt+1 /D = 1+ (bA/x) (8) Now we analyze output growth.g)βδ/(1 + αx)]}A – x (10) The growth factor of capital as well as the growth factor of public debt depend on the debt-capital ratio. To obtain the growth factor of capital we first have to solve for the endogenous tax rate. the tax rate has to be adjusted accordingly. Next. The slope coefficients are assumed to be the same across countries.

we identify the episodes of fiscal expansion or contraction. relative to their previous average. real GDP and government consumption growth increase. the average increase in real government consumption only occurs after the contractions. The Empirical Results The annual data is used to test whether the budget deficit episodes have an impact on savings. based on the private consumption deflator. we classify the episodes of “successful” fiscal contraction as a reduction of the debt-GDP ratio of at least 5 percentage points for three consecutive years. T/Y and G/Y are interacted with appropriately designed dummy variables d. the lagged value of the national saving rate is expected to capture the dynamics of the dependent variable. We use the GLS estimation method. the sample size is actually shorter. as reported in Table 2. Following the definition given by Alesina and Perotti (1995). The data are compiled from International Financial Statistics and Government Financial Statistics and published by International Monetary Fund. separately for fiscal expansions and contractions. The average value of real private consumption declines both after the expansions and contractions. On the other hand. and after the episodes of fiscal impulses that we identify in the Muslim countries. hence the total number of observations is only 385. In several countries. As shown in Table 1. but lack of financial data restricts the analysis to about 19 countries that cover the periods from 1971 to 2000. than contractions. during. however. As highlighted in Table 1. after fiscal expansion and contraction. while the output gap should reflect the response of private saving and of the government surplus to transitory changes in income. However. whereas an increase in government consumption reduces it (γ1 < 0). Our empirical specification can conveniently nest the various hypotheses. For instance. Our database includes the 57 Muslim countries. 3. The (ex-post) real interest rate is the difference between the short-term domestic rate and inflation. finite horizon models suggest that an increase in net taxes raises national saving (β1 >0). . To capture these circumstances. but the average increase in real GDP is sharper after the fiscal expansion than it is after the contractions. In the infinite horizon model with lump-sum taxes. These are listed in the appendix. First. the real GDP and private consumption growth are also higher during fiscal contractions than expansions.7 [Insert Table 1] In equation (11). fiscal policy has no effect on national saving (β1 = 0) and (γ1 = 0). the private sector response to fiscal shocks can be dramatically altered by expectational mechanisms. But. For instance. we supplement the panel regressions with country-specific estimates of equation [11]. we find 6 fiscal expansions and 32 fiscal contractions in the Muslim countries. in some circumstances. in order to avoid spurious inference. the government consumption growth is higher during fiscal expansions. Table 1 also reports the average values of selected macroeconomic variables before.

the estimated coefficients for all variables (except the intercept and constant) differ from zero.0009-3. Finally. large fiscal contractions reduce gross national saving (from 13. but during sharp fiscal contractions or fiscal expansions (row (6)). is significantly different from zero at the 5 percent level. the effects of net taxes on national saving remains negative (β1 = -0. the effect is greatly attenuated (β1+β2=-0.e. Our aim is to identify possible structural breaks in the relation between fiscal policy and national saving in examining: (i) a sizable fiscal impulse. test the hypothesis that the fiscal policy coefficients are stable. and reject the null hypotheses for the F-test.0663) than in normal times (as above. In each case. The significance level for each variable shows that only the model with fixed effects are much better in explaining the significant level of each explanatory variable. the sum of the two coefficients remains statistically significant). Second. In particular.0654=-3. on reduces in taxes)..8 The gross national saving rate increases considerably following expansions (from 4. These results strongly consistent with the Ricardian equivalence proposition. we thus turn to regression analysis to check if this purely descriptive evidence persists when conditioning for other factors affecting the national saving rate are taken care of. The other estimation results in Table 2. These descriptive statistics. so as to have a benchmark specification in which the effects of G and T are constrained to be linear. thus suggest that a reversed response of gross national savings to fiscal contractions and expansions. as reported in columns (2)-(6). we define an appropriate dummy variable. While the ρ value is compared to F value. which in principle is ambiguous.0527). Initially.8974) although it remains statistically not significant. (ii) a high ratio of public debt to GDP. The estimation results for the GLS model with fixed effects are presented in Table 2. Generally. The coefficients of T/GDP and G/GDP are negative.0527-2. the adjusted R2 values are good. the table also indicates that fiscal consolidation have relied on increases in the debt-GDP ratio and reduces in net taxes (i.81 percent to 7. measured as a large change in surplus (3%) and large increase in surplus (1.8447=-2. and only the later is significantly different from zero at the 5 percent level. The lagged national saving rate has a positive and significant coefficient. and (iii) a rapidly growing ratio between gross debt and GDP. In the regression reported in column (3) of Table 2 we find that the effect of fiscal policy differs between fiscal contractions and fiscal expansions. The results in column (2) indicates that during the “normal” times (with no dummies). Therefore.7 percent).5%). [Insert Table 2] Column (1) of Table 2 presents the estimation results of equation (1).7269) implies a large degree of persistence. whose size (0. On the contrary. In these episodes. the effect of government spending is also much smaller in absolute value (γ1+γ2 =-0. The effect of real interest rate. we do not allow the interaction between the fiscal variables with the dummy variables d.50 percent. The coefficient of the output gap is consistent with the effect predicted by theory: saving tends to increase in response to increases in national income.7 percent to 11. .

The bottom line is that an increase in net taxes reduces national saving. The dampening is particularly pronounced when the fiscal impulse comes on the side of government spending. The sign and size of the response to fiscal impulses may also depend on the perceived sustainability of the fiscal regime. However.9837). indicating that a high ratio of debt to potential output affect the impact of taxes and spending on national saving. The specifications in columns (3)-(5) do not allow for possible interactions among the ex-ante criteria (size and persistence of the fiscal impulse. during the year preceding the fiscal episode. when the increase in private consumption fully offsets the positive effect of taxes on the government surplus.9828=-2.0115) and significantly different from zero. the effect of fiscal policy can depend on the size of the public debt. but also if it has been rising rapidly in the recent past. and not statistically different from zero during large fiscal contractions (2. which could be complementary sources of the non-linear response of national saving to fiscal policy. but its absolute value in normal times (0. the effects of changes in taxes and spending are significantly dampened during large fiscal expansions. and 0 otherwise. Furthermore. To capture such occurrences.8173). gross public debt exceeds 70 percent of potential output. therefore. The results are reported in column (5) of Table 2. We also test for other values of the debt ratio (such as 80 percent or 100 percent). A regime may be perceived as unsustainable not only if the debt-income ratio is high. The sign of the interaction terms is not consistent with a smaller fiscal impact on national saving in the wake of rapid debt accumulation. we rely on the dummy for high debt growth computed and reported by Perotti (1999). and qualitatively the results are similar. while increases in government spending reduce it. Conclusions On the whole.0606+3. debt level and debt growth). According to some of the models outlined in Section 3. The evidence that these effects are related to a high or fast-growing debt income ratio is weak at best.7089=0.9 the effect of net taxes is negative (-0.7567=-0. The coefficient is always negative. . The coefficients of the interaction terms are large (-2. except during a sizable fiscal contraction.0009-2.0606+2.7080) and is almost twice as large as during sizable fiscal contractions (-0. The pattern for government spending is different.0009) below its value during sizable fiscal expansions (-0.1550 and -2. the results strongly support models in which increases in net taxes do not raise national saving. The estimates obtained from this nested specification are displayed in column (6) of Table 2: they confirm that the main source of non-linearity is the size of the fiscal impulse and the level of public debt. is to estimate a regression that includes all the interaction terms. The natural next step.8651=-0. The dummy equals 1 if the growth rate of the ratio of (cyclically adjusted) gross public debt to trend GDP exceeds 4 percent for two consecutive years.0009+0. In column (4) of Table 2 we interact taxes and spending with a dummy set equal to 1 if. the size and significance of the interaction terms are again stronger during expansions than during contractions.0606) in “normal” times.9257). 4. bigger during large fiscal expansions (3.

A. R. Blanchard. 1995. 1259-1289. G. Bernheim. and S. No. Economic Policy. are inconclusive. The analysis of individual-country experiences is a fruitful area of future empirical research. Comment on ‘Fransesco Giavazzi and Marco Pagano. 207-248. Or it may depend on the composition of the fiscal impulse: the relative importance of tax hikes and cuts in government consumption. . Can severe fiscal contractions be expansionary?’ NBER Macroeconomics Annual. or (v) the consolidation is effected by raising net taxes more than by cutting public consumption. 73-93. O. Pagano. not reported for brevity. Journal of Economic Perspectives. Barro. 1C. W. and M. References Alesina. 1989. 3. pp. 3.10 In this paper. (iii) public investment is growing in real terms. Alesina. Jappelli. D. Elmendorf. R. European Economic Review. Vol. Taylor. Amsterdam: Elsevier. Government debt. 44. No. 37-54. Searching for non-linear effects of fiscal policy: Evidence from industrial and developing countries. Fiscal expansion and adjustments in OECD countries. A need for additional time-series and cross-section evidence on the effects of fiscal consolidation in individual countries arises in order to be able to give sound policy advice. The results. Woodford (ed. pp. 27. 1999. A Neoclassical perspective on budget deficits. or pension transfers. T. 3. the non-linear effect of taxes and spending may depend on whether public debt is high or growing rapidly. In J. Drazen.5. because none of the additional interaction dummies is estimated with sufficient precision. (ii) the average change in the ratio of debt to potential output exceeds 4 percent in two consecutive years. 1989.B. Mankiw. 2. and Perotti. Vol. Can severe fiscal contractions be expansionary?’ NBER Macroeconomics Annual. B. pp. 487-545.21. 117-122. Tales of fiscal adjustment. A. In particular. 7. No. pp.1990.111-116. public investment. No. Eisner. Economic Policy. No. 1990. 55-72. pp. 2000.. J. Vol. A. Journal of Economic Perspectives. and M. F. Vol. when sizable changes in fiscal policy occur.. Vol. 2. and N. Giavazzi. pp. Journal of Economic Perspectives. 1989. we have also tried to investigate further the non-linear effects of fiscal policy.5. Ardagna. These findings may be important for policy making in Muslim countries: in the present situation a number of countries have to decide whether to reduce budget deficits gradually or to make a single strong consolidation effort in order to comply with the medium-run provisions of the stability and growth. (iv) social security benefits are reduced in real terms. J. 1998. Handbook of Macroeconomics. No. pp. No.).The Ricardian approach to budget deficits. R. We address these issues by interacting the dummy for “large fiscal contraction” and that for “large fiscal expansions” with dummy variables capturing episodes in which: (i) the ratio of public debt to potential output exceeds 70 percent. Budget deficits: Rhetoric and reality. No. D. pp. 2. Comment on ‘Fransesco Giavazzi and Marco Pagano.

7 .37 13. 1999. 1-2. C. Can severe fiscal contractions be expansionary? Tales of two small European countries. IMF Statistical Year Book.11 Giavazzi. Germany. Vol. Singapore: McGraw-Hill.33 57. Fiscal expansions Fiscal contractions Growth rate of real GDP Before During After Growth rate of real private consumption Before During After Growth rate of real government consumption Before During After Growth rate of real net taxes Before During After Debt/potential output Before During After National saving/potential output Before 0.85 8. Fiscal policy in good times and bad. Budget deficits and fiscal policy. 2001. No. Heylen F.12 7. Evaraert. Romer.22 4.31 76. Kiel Working Paper No. 2001.62 13. 1996-2003.60 70. 2nd Ed. 1399-1436. No. and M. in Advanced Macroeconomics. pp. 103124. Fiscal crises and aggregate demand: Can high public debt reverse the effect of fiscal policy? Journal of Public Economics.38 8. and G. F.83 10. Duesternbrooker Weg 120 24105 Kiel.54 13. No..88 12. pp. Success and failure of fiscal consolidation in the OECD: A multivariate analysis. No. Fiscal consolidation in Europe: Pre.06 9. Sutherland. pp.95 62.5 35. 67-103.67 13.and post-Maastricht.56 6. Vol. 147-162.48 7. Public Choice.21 12.39 12.09 59. 65. 114. pp. NBER Macroeconomics Annual. D.84 57. 105. Malaysia Economic Report. Table 1: Episodes of large and persistent fiscal expansions and contractions: Muslim countries data (1971-2000). Perotti. Vol. 1990.85 8. 1977-2002.08 11. Kamps. 2000. Kiel Institute of World Economics. 5.76 5. 2. Quarterly Journal of Economics. 1028. 1997.13 12.95 4.52 6.81 12.44 12. Pagano. 4. R.55 14.A.

0207) -0. Indonesia.73 32 Source: Data processed from yearly International Financial Statistics Yearbook and Government Finance Statistics Yearbook.0382) -0.0670** (-2.4512) -2. Yemen.0714** (-1.0124 (0.0343 (-0.9364) 0.7191* (20.4596) 0. Tunisia.0115*** (-1.12 During After Number of episodes 2.2152) -0.7173* (20. Cameroon.and high debt .2987 (1.7269* (20. Jordan.0527 (-0.0602** (-2.and large change in surplus . Kazakhstan.0925) -0. Kuwait. Chad. Regressions are estimated with fixed effect.0858) -0.9257 (1. Egypt.03 7.7186* (20.3160) 2.8173** (2.3102) -0.0577** (-2.0099 (0. Pakistan.1104* (2.8447 (-1.0214 (-0.3542) (5) 0.7227* (20.7347) 4. Gambia.4492) (2) 0.07 11. the dependent variable of this paper is the ratio of national saving to output.5748) 0.0715) 3.6789) -2.0012 (0. Bahrain.1858) -0. Lagged national saving rate (1) 0.7783) 0. Maldives.1131) -0.2849) -2.0612** (-2. T-statistics are reported in parenthesis.7779) (4) 0.0150) (6) 0.2666) Output Gap Real interest rate Net Taxes/GDP (T/GDP) . Malaysia. Mali).4985) 3.0606 (-0.0179 (0.1718) -0. Table 2: The Fiscal Policy Effects on National Saving Using pooled data from 19 muslim countries (Algeria.7014* (19.5222) 0. Oman.0657** (-2.7661) 0.and large decrease in surplus .0577** (-2.0011 (-0. Kyrgyz Republic.0269 (-0.0022 (0.50 6 14.4469) -0. Syria Arab Republic.and large increase in surplus .2254) -0.0065 (0.6613) (3) 0.4089) -0.

0000 0.0569) -1.0738* (-2.7674 529.2294) 0. 75-78.7788 530.0673) -0.9020 0.5285) -0. 92-93. 91-93 81-82 79-80.5197) -3.6626) -1.0000 0.4989) -2.0009** (-2.0714** (-1.7663 529.6795 (-1.0009** (-2.0000 0. 88-90 96-97. 98-99 85-86. Country Algeria Bahrain Cameroon Chad Egypt Gambia Indonesia Jordan Kazakhstan Kuwait Kyrgyz Republic Malaysia Maldives Mali Oman Pakistan Sample period 1990 – 2000 1976 – 2000 1975 – 2000 1985 – 2000 1980 – 2000 1975 – 2000 1984 – 2000 1971 – 2000 1994 – 2000 1980 – 2000 1993 – 2000 1980 – 2000 1980 – 2000 1975 – 2000 1980 – 2000 1975 – 2000 Fiscal expansions Fiscal contractions 96-97 82-84.and large decrease in surplus .1550** (-1.5285) 0.6469) -0.0000 -0. 92-95.0000 0.7953 (-1. 98-00 99-00.4916) 0. 86-87 85-86.2415) -2.8010 0.7739 530.0009** (-1.7377) -1.8610 0. 98-00 99-00 82-83.7089 (0.7355* (0. 90-91.0007** (-1. .9028) -0.13 . 84-86.1020 0.6286 (-1.7678 529.and rapid debt growth Adjusted F.and large change in surplus .and large increase in surplus -0. 85-86.1688) -2. 83-84. 87-88.9020 0.6795 (-1.and rapid debt growth Government spending/GDP (G/GDP) . 94-95.6613) -1.2010 0. 96-97 99-00 84-85 85-86. 90-91.9890) .0689) -3.0654 (-1.and high debt .0007*** (-1. 87-88 88-91 Syria Arab Republic 1975 – 2000 1975 – 2000 Tunisia 1990 – 2000 Yemen Source: Data processed from yearly International Financial Statistics Yearbook and Government Finance Statistics Yearbook.statistic P R2 Note: * ** *** Significant at 1% level Significant at 5% level Significant at 10% level Appendix: Countries and sample period used in the estimation: selected muslim countries.0009** (-2. 81-82.0000 0. 99-00 82-83.7655 529.9828** (-2. 84-85. 97-98 87-92.

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