Fiscal policy and oil factor: Evaluation of the effects in global economic development

Abstract

Research background: Today, the acceptance of fiscal policy decisions necessitates the analysis of policy efficiency with the help of optimization issues, the study of cause-and-effect relationships between budget expenditures and macroeconomic indicators such as economic growth, revenues, and the evaluation of a number of econometric models among all. The need for these areas makes it important to study and analyze the effects of fiscal policy on the economy, which allows to justify the relevance of the topic of the article. Purpose of the article: The article is devoted to the assessment of the fiscal and economic consequences of changes in oil prices in the world market, as well as the study of the relationship between state budget revenues and government expenditure in Azerbaijan. It was revealed that a 1% increase in oil prices, in the long run, increased Azerbaijan’s GDP by 0.52% and state budget expenditures by 0.88%. The calculations allow to conclude that there is a high correlation between government spending and state budget revenues in Azerbaijan. The obtained result indicates a positive relationship between the aforementioned economic variables. Methods: The most common method of analyzing the possible causal relationship between macroeconomic indicators is the causality test proposed by Granger in 1969. However, from a methodological point of view, the application of this test to study the causal relationship between economic indicators requires these indicators to be stationary. This statistical feature can be violated in the case of the economic indicator having the single root elements. To do this, we tested the Unit root problem of the variable using the Augmented Dickey-Fuller test. Simultaneously, a number of other important features of the evaluated models were tested and the adequacy of the models was confirmed. Findings & Value added: As a result of the research, it was determined that there is a short-term and long-term causal relationship between world oil prices and Azerbaijan’s GDP and state budget expenditures. According to the results, a 1 percent increase in oil prices leads to the increase of the current level of GDP growth in Azerbaijan by 0.20 percent in the short term, and by 0.52 percent in the long term. Parallelly, it was revealed that a 1 percent increase in world oil prices leads to a 0.88 percent increase in Azerbaijan’s state budget expenditures in the long run. The correlation between Azerbaijan’s government expenditures and state budget revenues was analyzed, and a high correlation between these two macroeconomic indicators was identified.

Keywords

• government spending
• gdp
• budget revenues
• economic revival
• long term period
• macroeconomic variables