Essays in Empirical Macroeconomics

Abstract

This thesis is a collection of five essays in empirical macroeconomics. The first paper evaluates the effectiveness of fiscal policy in different economic environments. The results show that, contrary to conventional wisdom, fiscal multipliers are not necessarily smaller in countries relatively open to trade and financial flows and operating under flexible exchange rates. The relationship between the size of fiscal multipliers and the three dimensions of openness — trade openness, capital mobility, and exchange rate flexibility — hinges on the response of the real exchange rate and the degree of monetary policy accommodation, which underscores the importance of fiscal and monetary policy interaction in understanding the fiscal transmission mechanism.

The second paper examines the effects of an adverse oil price shock in oil-exporting countries under alternative exchange rate and fiscal policy arrangements. The results show that output and government consumption fall, as expected, but the responses are smaller and smoother in countries with flexible exchange rates and oil funds. This highlights the shock-absorbing property of flexible exchange rates and the macroeconomic stabilization role of oil funds, making a case for oil exporters to adopt more flexible exchange rates and establish oil funds as fiscal buffers.

The third paper examines the roles of oil funds and institutional quality in reducing fiscal procyclicality and macroeconomic volatility in oil-exporting countries. The results show that oil funds are effective in reducing fiscal procyclicality in countries with high institutional quality. There is also a reduction in the procyclical bias in countries with low institutional quality but the evidence is less compelling. Nonetheless, oil funds are associated with reduced volatility of government consumption and the real exchange rate in countries with low institutional quality. These findings demonstrate the potency of oil funds in macroeconomic stabilization, but also reinforce the importance of good institutions.

The fourth paper examines the conduct of fiscal policy in Brunei, focusing on the cyclical patterns in government expenditure. In spite of relatively large fiscal buffers in Brunei’s oil funds, the results provide evidence of procyclical fiscal policy, which exacerbates the business cycle. This behaviour is primarily driven by procyclical current expenditure while capital expenditure is largely acyclical. A key policy recommendation would be to adopt clear fiscal rules to integrate the oil funds into the country’s macroeconomic policy framework to delink government spending from volatile oil revenue.

The fifth paper investigates the sources of macroeconomic fluctuations in Brunei. The results show that oil price shocks account for only a small proportion of output fluctuations while productivity shocks have the largest share. Real exchange rate movements are largely driven by demand shocks while monetary shocks explain most of the variability in prices. Economic policies should focus on productivity improvement and capital investment to increase output in the long run, and the conduct of fiscal policy should take into account the impact on real exchange rate volatility.