Economic, political and institutional determinants of budget deficits volatility : a panel data analysis

Abstract

This study has a major motivation to empirically find the fundamentals of budget deficit instability for the period 1984 to 2016 using panel data for South Asia and ASEAN countries. As main determinants the study has considered the role of institutions, governance variables like corruption, political instability, military in politics and conflicts. The economic data is collected from international financial statistics and world development indicators. The data on political variables are collected from International Country Risk Data Guide (ICRG). Panel data models like Fixed Effect and Random Effect Model are used to test the volatility of budget deficit. To make a comparison between results of panel data models and time series analysis this study also makes an arrangement analysing individual countries, using time series data. The results of panel data models and time series models of individual countries both confirm that corruption and political stability are important indicators of budget deficit. To avoid high and unstable deficit attention should be diverted to improve the institutional setup of the economy.