The Effect of Fiscal Deficit on Economic Growth in an Emerging Economy: Evidence from Vietnam
Fiscal deficit has been sharply increasing in the developing economies worldwide. This paper examines the effect of fiscal deficit on economic growth in Vietnam, the country now is one of the most dynamically emerging countries, but its government has been facing large fiscal deficits for many years by now. Our study has applied the Error Correction model on the quarterly data of 2003-2016. The empirical results strongly indicate there is a cointegration relationship between fiscal deficit and economic growth in Vietnam, in which fiscal deficit had harmful effects on economic growth in both short and long run. In particular, the correlation analysis has confirmed that fiscal deficit can hurt not only the gross output but also private investments, foreign direct investments, and net exports. Our results provide evidence for policymakers, and not only in Vietnam but also in other emerging countries which are in need of urgent solutions so that to reduce the fiscal deficit rate and have more sustainable growth in the future.(original abstract)
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