My Research

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Characterization of The Impact of Fiscal Policy on Output in Oil-Exporting, Developing Countries (job market paper)

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The price of global oil prices saw an unprecedented plunge in 2014, followed by a further weakening in 2015 and 2016 that it has yet to recover from. Given the dependency of oil-exporting, developing countries on oil income, it is critical to adopt a new (fiscal) policy paradigm that helps to stabilize the economic growth in the face external shocks, and the fiscal policy multiplier effect is a key concept in the new paradigm. In this paper, we estimate the multiplier effect of fiscal policy in 27 oil-exporting, developing countries, using real-time fiscal spending forecast errors, 1990-2017. Employing the identification approaches suggested in the literature, the results propose that the impact multiplier is between 1.4 and 1.6. However, once we control for the spurious relationship between the fiscal spending and output, the size of the multiplier decreases significantly to 0.4. Furthermore, we estimate state-dependent multipliers that depend on boom-bust cycles in the global oil market as well as domestic business cycles. The results suggest that the multiplier effect is larger (than the baseline) during a recession or when global oil prices are considered low, 0.8, and smaller and negative during an expansion or when oil prices are considered high, -0.2.

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Oil Price Shocks and Economic Growth in Oil-Exporting Countries: Does the Size of Government Matter?

An earlier version was published as an IMF working paper No. 287 (2017): PDF

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We investigate the correlation between government size and output volatility for a sample of oil-exporting, developing economies. Government spending relative to GDP is used as a proxy for the size of the government. The sample includes 27 countries over the period 1990-2017. Our contribution is the development of an empirical model that analyzes the role of government size in an interactive vector auto-regression model where global oil price shocks are the primary source of volatility in output (and government spending). The results confirm the stabilizing role of the government. Next, government spending is decomposed into consumption and investment components. The results suggest that consumption expenditure acts as a stabilizer while public investment is destabilizing. Furthermore, a univariate Unobserved Components model is developed to decompose the oil price shocks into permanent and transient shocks, and the model is estimated using the Kalman filter. The results suggest that output volatility, which is driven by oil price shocks, is largely due to permanent shocks.

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The results of the UC model are available here: PDF

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How Public Investment Could Help Strengthen Iran’s Growth Potential: Issues and Options

IMF working paper No. 129 (2018): PDF

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We use a dynamic stochastic general equilibrium model and modify and calibrate it to the current Iranian context. Several scenarios are simulated to illustrate alternative fiscal policies and oil price paths. The results suggest that public investment scaling-up is viable under all scenarios. However, the size of fiscal adjustments required to accommodate a substantial investment front-loading is considerably larger than when a gradual or a conservative investment scaling-up approach is taken, and the outcome in terms of output growth is not much different from that of the gradual or the conservative approach. Structural reforms that improve the efficiency of public investment can increase the gains from an investment scaling-up while using an oil-fund is very helpful to reduce the size of fiscal adjustments, particularly if investment projects are to be carried out in spite of adverse global oil price shocks.

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Trends and Determinates of Foreign Direct Investment in South Asia,” 2014, with David Gould and Congyan Tan. South Asia Economic Journal. v15: 133-174 - PDF

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Like many other developing countries, South Asian nations have been experiencing increased foreign direct investment inflows over the past decade as developing countries get a larger share of cross-border investments that were once sent to developed countries. Nonetheless, South Asia’s inflows of foreign direct investment remain the lowest relative to gross domestic product among developing country regions. Why are South Asia’s foreign direct investment inflows so low and what lessons can be drawn for developing countries as a whole? The analysis in this article uses a novel empirical model that accounts for possible trends in convergence in the ratio of foreign direct investment to the gross domestic product between countries and cross-sectional data for 78 countries from 2000 to 2011. The sample contains 52 developing countries. The analysis finds that two key factors are at work—high overall regulatory restrictions on foreign direct investment and specific restrictions placed on doing business with other countries. These factors include overall trade restrictiveness, which reduces the benefits to cross-border investments, and weak institutions to protect foreign investors and facilitate investment. Nonetheless, the potential for faster growth in intra- and inter-regional foreign direct investment flows is significant. The main factors leading to this conclusion are South Asia’s current low levels of foreign direct investment, the many unexploited opportunities for embodied knowledge transfer, and supply-chain linkages. The overall lessons for developing countries are that liberalizing policy constraints in both trade and foreign investment, keeping corporate tax rates modest, and improving governance and transparency could help to improve foreign direct investment flows substantially.

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