Jurnal
EKONOMI
PEMBANGUNAN
Kajian Ekonomi Negara Berkembang Hal: 185 Ae 202
THE SUSTAINABILITY OF FISCAL POLICY
AND DEFICIT BUDGET FINANCING:
EVIDENCE FROM SELECTED MUSLIM COUNTRIES
Muhammad Zilal Hamzah Economic Faculty Trisakti University-Indonesia Abd.
Ghafar b.
Ismail Islamic Economic and Finance Research Group Faculty of Economic.
Universiti Kebangsaan Malaysia Abstract The sustainability of fiscal policy and how to finance the deficit budget has been receiving increasing attention from economists.
The issue is paramount for the Muslim Countries and this is one of the motivations of the paper.
In order to assess the sustainability of budget deficits in selected Muslim countries, a descriptive statistics for the stock of revenue, expenditure, tax over GDP and sustainability tests of government debt and deficit are performed for the Muslim countries for the 1971-2000 period.
The cointegration model is also used to test the relationship between government expenditures, taxes, and seigniorage.
The results show that the Muslim countries use taxes and seigniorage to finance their government expenditures.
The empirical results also allow us to conclude that fiscal policy may be sustainable for most Muslim countries.
JEL classification: E60.
H62.
H63.
Keywords: deficit finance.
inter-temporal budget constraint.
fiscal policy.
monetary policy.
islamic countries.
INTRODUCTION
The fiscal deficits and the government debt in 1980Aos and 1990Aos have sharply increased, either in the developed and developing countries or countries in transition.
Several Islamic countries which are known as countries in transition also have been exposed to the increasing amount of government debt and fiscal deficits.
The increasing amount of government debt and the fiscal deficits are expected to pose a serious threat to the countryAos economic development.
The high fiscal deficits must be financed either by borrowing or by printing money .
The borrowing policy .
may redistribute during the lifetime the resources of the younger to the older generations and from the unborn to current generations, cause financial crowding out of the private sector, and reduce the level of establishing domestic fixed capital.
When the government reaches the limit of the amount of the debt that the domestic private sector and the rest of the world absorb voluntarily, the monetization of the deficit is an alternative financial option.
But, the expansion of money supply can increase the expected inflation rates, and hence, increase in the nominal interest rate, and depreciation of the national currency.
Several Muslim countries worry that a dramatic rise in the government debt derails the sound economic growth as has been seen in developed countries, including U.
Jurnal Ekonomi Pembangunan Vol.
10 No.
Desember 2005 Hal: 185 Ae 202 .
Germany and Japan.
Although, in some Muslim countries like Bahrain and Oman, debt to the GDP, as reported in Table 1, are still lower than those of some developed economies most of which vary from 40% to 60%, as shown in Table 2.
However, government debt, once it begins to accumulate, tends to surge continuously due to growing interest payment burden.
Table 1: Government Revenues.
Expenditures.
Debts, and Taxes in the Muslim Countries .
s a % of GDP) Country Bahrain Items Revenue Expenditure Debt Tax Cameroon Revenue Expenditure Debt Tax Guyana Revenue Expenditure Debt Tax Indonesia Revenue Expenditure Debt Tax Jordan Revenue Expenditure Debt Tax Malaysia Revenue Expenditure Debt Tax Oman Revenue Expenditure Debt Tax Pakistan Revenue Expenditure Debt Tax Sierra Lyon Revenue Expenditure Debt Tax Tunisia Revenue Expenditure Debt Tax Mean The Sustainability of Fiscal Policy and Deficit Budget A (Muhammad Zilal Hamzah & Abd.
Ghafar b.
Ismai.
Table 2: Government Debts of Four Advanced Countries .
s a % of GDP) Country United State United Kingdom Germany Japan Notes: a = 1983 The increasing amount of government debt has produced raising concern about the sustainability of government deficits and fiscal consolidation.
Already quite a lot of literature has studied the issue of fiscal For example.
Artis and Marcelino .
Athanasios and Sidiropoulos .
Baglioni and Cherubini .
Bohn .
Buiter and Patel .
Haug .
Makrydakis.
Tzavalis and Balfoussias .
Since, this issue is paramount for the Muslim countries and this is one of the motivations of this paper.
The government revenues that come from taxes or seigniorage have important role to improve fiscal deficit.
But, the excessive seigniorage may generate the problem to monetary sector.
It implies that the expansionary of monetary policy may distort the economic activities.
Hence, there is a need to harmonize the monetary and fiscal policies in order to balance between increasing taxes and price level.
Thus, the main purpose of this paper is to provide an overview of fiscal and monetary stance for the last three decades and the policy implications for fiscal consolidation by assessing fiscal sustainability and long run .
relationship in Muslim countries.
The remaining discussion of this paper will be divided into four sections.
Section 2 summarizes the theoretical framework, focusing on the present value budget constraint (PVBC) which forms the basis for stationary test of fiscal policy.
The tests of sustainability will be performed in Section 3.
Historical facts about fiscal sustainability in the Muslim countries and the empirical test of the sustainability hypothesis and cointegration results are the main focus in section 4.
And conclusion is given in section 5.
THE THEORETICAL FRAMEWORK
The writing about the public debt problem was first mentioned by Keynes .
in the beginning of the 1920s.
alerted to the need for the French government to conduct a sustainable fiscal policy in order to satisfy its budget constraint.
Keynes also stated that the absence of sustainability would be evident when the governmentAos liabilities have reached an excessive proportion of the national income.
In the current terms, sustainability is challenged when the debt-to-GDP ratio reaches an excessive value.
There is a problem of sustainability when the government revenues are not enough to keep on financing the costs associated to new issuance of public debt.
In other words, the sustainability issue becomes clear when the claims of the bond-holders are more than the taxpayers can support.
At this stage, the government need to take measures that allow regaining the sustainability of fiscal policy, , the government must come in due course to some compromise between increasing taxation, and diminishing expenditure, and reducing debt.
Jurnal Ekonomi Pembangunan Vol.
10 No.
Desember 2005 Hal: 185 Ae 202 The renewed interest on this issue has encouraged researchers such as Blanchard et al .
to present a definition of sustainable fiscal policy.
In the short-term, this policy allows the debt-to-GDP ratio returns to its original level after some excessive Hence, for a fiscal policy to be sustainable, after having accumulated debt in the past, the government must run surpluses in the future.
In the following discussion, the definitions for fiscal policy sustainability will be In every period, the fiscal sustainability that satisfies a static budget constraint can be written as:
Bt = .
Bt-1 Dt .
where Bt is the government debt at period t, r is the discount rate, and D is the fiscal Rewriting equation .
for periods t 1, t 2, t 3.
A, and recursively solving that equation leads to the following intertemporal budget constraint:
Cu Bt-1= Eu j 1Dt j lim j 1Bt j .
j CCu where =1/.
and j 1 is the discount factor applying between periods t and t j.
From equation .
, sustainability requires that the present value of future surpluses must exceed the present value of deficits by a sufficient amount to cover the difference between the initial debt stock and the present value of the terminal debt stock.
If the present value of the terminal debt stock is positive, equation .
can be satisfied even if a government rolls over its debt in full every period by borrowing to cover both principal and interest payments.
However, when the limit term is zero, this means that in the long run the government will have to stop using Ponzi games to finance fiscal deficits.
Therefore, the government cannot roll over its debt in full every Cu Bt-1=- Eu j 1Dt j .
Thus, a no-Ponzi game restriction is typically regarded as synonymous with sustainability, which implies that the transversality condition, lim j 1Bt j, has to hold.
fact, this condition will hold as equality since individual investors cannot end up being indebted to the government, which means constraining the debt to grow no faster than the interest rate.
Consequently, a sustainable fiscal policy has to satisfy the inter-temporal budget constraint (PVBC).
That is, sustainability requires that an excess of future primary surpluses over primary deficits match the current stock of government debt in present value terms.
Fiscal sustainability can be used to in every countries can be reached with optimalized the resource of taxes and seigniorage.
It can be optimalized if the distortionary cost for both of resources are minimized (Mankiw 1.
For this condition, every country must running the fiscal and monetary policy in one synchronization.
To understand the impact of monetary policy and fiscal policy for the budget deficit which financed by borrowing, the following approach of budget constraint will be used:
( G A T ) A AEM / P .
where G is the government expenditures.
T is taxes, and AEM / P is represents the amount of government spending that must be financed through creating more money or also known as seigniorage revenue.
Hence, the seigniorage can be write as:
St = iM/P = (Mt Ae Mt/P.
The equation of budget constraint will generate the implication that the present value of the revenues equals to government To know weather budget constraint are running well, cointegration test The Sustainability of Fiscal Policy and Deficit Budget A (Muhammad Zilal Hamzah & Abd.
Ghafar b.
Ismai.
has done for a set of variables, that are: public expenditures (G), taxes (T), and seigniorage rate (S), with assumption of all variables are not stationer at level but stationer at first different.
The function can be write Gt =f (Tt,S.
Meanwhile to know weather fiscal policy and monetary policy done synchronization, cointegration test has done for a set of variables, that are: public expenditures (G), taxes (T), and general price rate (P).
The function can be write as:
Gt =f (Tt,P.
For the cointegration test, this study use the Johansen Cointegration Test and data is in the log data.
SUSTAINABILITY TESTS
We are now interested in the question of whether the creditors could rationally expect the government budget would be balanced in the present-value terms.
If the PVBC holds for historical data, then the null lim j 1Bt j = 0 .
will not be rejected in statistical tests.
Then, the appropriate sustainability test is to examine if the historical process that generate fiscal data is, as mentioned by Chalk and Hemming .
, likely to result in the PVBC eventually being violated.
so, fiscal policy and thus the data generating process will have to be changed and current policy should be regarded as unsustainable.
Equation .
is mathematically equivalent to equation .
, the model proposed for studying self-fulfilling hyperinflation and applied by Hamilton and Flavin .
Bt =A0.
t Ae Et Eu j 1 Dt j At .
Where the operator Et denotes the expectations of creditors and At is the regression disturbance term reflecting expected changes in real short-term interest rates, the term structure of long rates and measurement error.
Hamilton and Flavin suggest that, for any stationary process for (At.
Et Eu Dt .
, when A0=0.
Bt will be stationary, whereas A0 >0.
Bt will not be stationary.
They also propose that the test to determine whether A0=0 is based on the observation that if the process for the discounted sum of future deficits is stationary, then Bt is stationary if and only if A0=0.
It should be noted here that this is a sufficient but not necessary condition for sustainability, fiscal policy could be sustainable even if debt is The annual data is used to test whether the bubble term turns out not to be zero and the hypothesis that fiscal policy should be regarded as sustainable.
Our database includes the 57 Islamic countries, but lack of financial data restricts the analysis to about 10 countries.
The data are compiled from International Financial Statistics and Government Financial Statistics and published by International Monetary Fund.
THE RESULT
This section will summarize the stylized facts about the fiscal policy sustainability in the Muslim countries and the empirical test of the sustainability hypothesis.
Finally, the cointegration results will also be presented in this section.
Some Stylized Facts As reported in Table 1 .
lso see graph .
, between the ends of 1971s and the ends of 2000 there was an increasing trend of the debt-to-GDP ratio for most countries throughout the period.
It can be divided in to two significant periods that are the period of year 1987-1992 and the period of year 19972000.
This period shows that in generally, every ten years cyclically, the countries faced for the crisis of economic.
For exam- Jurnal Ekonomi Pembangunan Vol.
10 No.
Desember 2005 Hal: 185 Ae 202 ple, public debt rose slightly in Bahrain from 7 per cent of GDP in 1971 to 29.
3 per cent of GDP in 2000.
Bahrain has the lowest debt-to GDP ratio among the countries.
Cameroon.
Indonesia.
Jordan.
Malaysia.
Oman, and Tunisia have the moderate level of debt among that countries.
The highest level of debt-to-GDP among them just between 90 per cent until 100 per cent.
The highest reported debt-to-GDP ratios are in Guyana.
Pakistan, and Sierra Lyon.
The percentage of debt-to-GDP in Guyana rose 8 in 1971 to 585.
3 in 1990 and become 615.
2 in 1991, in Pakistan 663.
2 in 1975, and in Sierra Lyon 247 per cent in But Guyana and Pakistan could maintain the debt successfully and reduced the debt until 239 per cent and 89.
3 in the ends 2000 .
venthough this percentage still hig.
AuMaastricht AgreementAy .
riteria for fiscal confergence of the Maastricht Agreemen.
the gross public debt notto exceed 60 per cent of GDP).
Graph 1: Percentage debt to GDP of ten Muslim countries from year 1971 until year 2000
Percentage of GDP
DEBTBAH
DEBTCAM
DEBTGUY
DEBTIND
DEBTJOR
DEBTMAL
DEBTOM
DEBTPAK
Year
DEBTSIE
DEBTTUN
The Sustainability of Fiscal Policy and Deficit Budget A (Muhammad Zilal Hamzah & Abd.
Ghafar b.
Ismai.
The percentage of government expenditure and revenue to GDP for each Muslim country is shown Table 1 .
lso see Graph 2 and Graph .
The main conclusion is that the burden of public expenditures and revenues on GDP has increased since the 1970Aos for almost every country, except for Indonesia.
Even, in year 1982 and year 1986 public expenditures in Guyana reach more than 100 per cent of its GDP.
Also another obvious fact is that for most countries, the ratio of government expenditures to GDP exhibited a higher growth rate than the ratio of government revenues to GDP.
That means, every country has the deficit budget.
The highest deficit budget holds by Guyana especially in the period of 1982-1986.
This conclusion holds for all countries except for Bahrain and Cameroon.
Both the growth of seigniorage and taxes as the indicator of expansionary monetary and fiscal policies are shown in Graphs 4 and 5, respectively.
Sierra Lyon shows the highest growth of seigniorage.
It reaches the highest level 94 per cent of GDP in year Its mean Sierra Lyon gets the revenue from the monetary sector more than the fiscal sector.
Mean a while, another 9 countries .
hich have the same volality about the seigniorage polic.
get the revenue from the fiscal sector more than the monetary sector.
Graph 2: Percentage deficits over GDP of ten Muslim Countries from year 1971 until year 2000
Percentage of GDP
Year
DEFBAH
DEFCAM
DEFGUY
DEFIND
DEFJOR
DEFMAL
DEFOM
DEFPAK
DEFSIE
DEFTUN
Jurnal Ekonomi Pembangunan Vol.
10 No.
Desember 2005 Hal: 185 Ae 202
Graph 3: Percentage Government expenditures over GDP of ten Muslim Countries from year 1971 until year 2000
Percentage of GDP
Year
GBAH
GCAM
GGUY
GIND
GJOR
GMAL
GOM
GPAK
GSIE
GTUN
Graph 4: Percentage seigniorage over GDP of ten Muslim Countries from year 1971 until year 2000
Percentage og GDP
Year
SEIGBAH
SEIGCAM
SEIGGUY
SEIGIND
SEIGJOR
SEIGMAL
SEIGOM
SEIGPAK
SEIGSIE
SEIGTUN
The Sustainability of Fiscal Policy and Deficit Budget A (Muhammad Zilal Hamzah & Abd.
Ghafar b.
Ismai.
Graph 5: Percentage taxes over GDP of ten Muslim Countries from year 1971 until year 2000
Percentage of GDP
Year
TBAH
TCAM
TGUY
TIND
Sustainability Tests The study of public debt (B) and budget deficit (D) stationarity for each Muslimic country will be explained below.
Augmented Dickey-Fuller test and PhillipPeron Test are used in the attempt to validate the sufficient sustainability condition.
Table 3 and 4 give the stationarity tests results for the level of the public debt and budget deficit, with the sample period shown in column two.
The critical 1 and 5 percent E values with intercept are -3.
75 and 00, respectively.
The results from the augmented Dickey-Fuller unit root tests are reported in TJOR
TMAL
TOM
TPAK
TSIE
TTUN
Table 3.
The results show that the process .
-L)D is stationary in Cameroon.
Guyana.
Malaysia.
Oman.
Pakistan, and Tunisia.
The process .
-L)B is stationary in Pakistan.
Similarly, the Phillips-Perron test results are presented in Table 4, and also the summary in Table 5.
The results show that the budget deficit and the debt are stationary in Cameroon.
Guyana.
Indonesia.
Jordan.
Oman, and Tunisia.
However, in Malaysia only budget deficit is stationary, in Sierra Lion only debt is stationary, and in Bahrain and Pakistan budget deficit and debt is not stationary.
In both cases, we can reject the hypothesis of a unit root at the 5% level.
Jurnal Ekonomi Pembangunan Vol.
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Desember 2005 Hal: 185 Ae 202 Table 3: ADF Stationarity test for public debt and budget deficit Country Sample Bahrain 1975 Ae 2000 Cameroon 1975 Ae 1999 Guyana 1971 Ae 1979 Indonesia 1977 Ae 2000 Jordan 1971 Ae 2000 Malaysia 1960 Ae 1999 Oman 1971 Ae 2000 Pakistan 1971 Ae 2000 Sierra Lyon 1974 Ae 2000 Tunisia 1972 Ae 2000 Variable .
-L)B .
-L)B .
-L)B .
-L)D .
-L)D .
-L)D .
-L)B .
-L)B .
-L)B .
-L)D
-L)D
-L)B
-L)B
-L)B
-L)D
-L)D
-L)B
-L)B
-L)B
-L)D
-L)D
-L)D
-L)B
-L)B
-L)B
-L)D
-L)D
-L)D
-L)B
-L)B
-L)D
-L)D
-L)D
-L)B
-L)B
-L)B
-L)D
-L)D
-L)B
-L)B
-L)D
-L)D
-L)B
-L)D
-L)B
-L)D
-L)D
ADF- Statistic 764973*** 818839*** 873152*** Intercept Lag The Sustainability of Fiscal Policy and Deficit Budget A (Muhammad Zilal Hamzah & Abd.
Ghafar b.
Ismai.
Table 4: Phillip Perron Stationarity test for public debt and budget deficit Country Sample Bahrain 1975 Ae 2000 Cameroon 1975 Ae 1999 Guyana 1971 Ae 1997 Indonesia 1977 Ae 2000 Jordan 1971 Ae 2000 Malaysia 1960 Ae 1999 Oman 1971 Ae 2000 Pakistan 1971 Ae 2000 Siera Lyon 1974 Ae 2000 Tunisia 1972 Ae 2000 Variable .
-L)B .
-L)B .
-L)B .
-L)D .
-L)D .
-L)D .
-L)B .
-L)B .
-L)D .
-L)D
-L)B
-L)B
-L)D
-L)D
-L)B
-L)B
-L)D
-L)D
-L)B
-L)B
-L)D
-L)D
-L)B
-L)B
-L)B
-L)D
-L)D
-L)B
-L)B
-L)D
-L)D
-L)B
-L)B
-L)B
-L)D
-L)B
-L)B
-L)D
-L)B
-L)B
-L)D
-L)D
PP-Statistic Intercept Lag Jurnal Ekonomi Pembangunan Vol.
10 No.
Desember 2005 Hal: 185 Ae 202 Table 5: Summary of fiscal policy sustainability Country Period Bahrain 1971 Ae 2000 Cameroon 1971 Ae 1999 Guyana 1971 Ae 1979 Indonesia 1977 Ae 2000 Jordan 1971 Ae 2000 Malaysia 1971 Ae 1999 Oman 1971 Ae 2000 Pakistan 1971 Ae 2000 Sierra Lyon 1971 Ae 2000 Tunisia 1971 Ae 2000 Test Performed Deficit Public debt Deficit Public debt Deficit Public debt Deficit Public debt Deficit Public debt Deficit Public debt Deficit Public debt Deficit Public debt Deficit Public debt Deficit Public debt Cointegration Test The study of budget constraint and the fiscal and monetary policy harmonization/ syncronization stationarity and cointegration for each Muslimic country will be explained below.
Augmented Dickey-Fuller test and Phillip-Peron Test are used in the attempt to validate the sufficient sustainability condition.
Table 6 and 7 give the stationarity tests results for the level of the public government, taxes, general price rate, and seigniorage, with the sample period shown in column two.
The critical 1 and 5 percent E values with intercept are -3.
75 and -3.
Sustainability? Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes The results from the augmented Dickey-Fuller unit root tests are reported in Table 6.
The results show that the process .
-L)G is stationary in Bahrain.
Guyana.
Oman.
Pakistan, and Tunisia.
The process .
-L)T is stationary in Bahrain.
Guyana.
Indonesia.
Oman, and Tunisia.
The process .
-L)P is stationary in Bahrain.
Guyana.
Oman, and Tunisia.
The process .
-L)S is stationary in Bahrain.
Indonesia.
Pakistan, and Tunisia.
Similarly, the Phillips-Perron test results are presented in Table 7.
The results show that the process .
-L)G, .
-L)T, .
-L)P, and .
-L)S are stationary in all Muslimic countries.
Only Sierra Lyon, where the (.
-L)P is not stationary.
The Sustainability of Fiscal Policy and Deficit Budget A (Muhammad Zilal Hamzah & Abd.
Ghafar b.
Ismai.
Table 6: ADF Stationarity test for Consumer Price (P).
Government Expenditure (G).
Tax (T), and Seigniorage (S), for period 1971-2000.
Country Bahrain Cameroon Guyana Indonesia Jordan Malaysia Variable .
-L)G .
-L)T .
-L)T .
-L)P .
-L)S .
-L)G .
-L)G .
-L)T .
-L)T .
-L)P
-L)P
-L)S
-L)S
-L)G
-L)G
-L)T
-L)T
-L)P
-L)S
-L)S
-L)S
-L)G
-L)G
-L)G
-L)T
-L)T
-L)P
-L)P
-L)P
-L)S
-L)S
-L)G
-L)G
-L)T
-L)T
-L)P
-L)P
-L)S
-L)S
-L)G
-L)G
-L)T
-L)T
-L)P
-L)P
-L)S
-L)S
ADF-Statistic 284856*** Intercept Lag Jurnal Ekonomi Pembangunan Vol.
10 No.
Desember 2005 Hal: 185 Ae 202 Table 6: (Continue.
Country Oman Pakistan Siera Lyon Tunisia Variable .
-L)G .
-L)T .
-L)T .
-L)P .
-L)P .
-L)S .
-L)S .
-L)G .
-L)G .
-L)T
-L)T
-L)T
-L)P
-L)P
-L)S
-L)G
-L)G
-L)T
-L)T
-L)P
-L)P
-L)S
-L)S
-L)G
-L)G
-L)T
-L)T
-L)P
-L)P
-L)S
-L)S
ADF-Statistic 780485*** 943044*** 460624*** 631310*** Intercept Lag Table 7: Phillip Perron Stationarity test for Consumer Price (P).
Government Expenditure (G).
Tax (T), and Seigniorage (S), for period 1971-2000.
Country Bahrain Cameroon Variable .
-L)G .
-L)T .
-L)T .
-L)P .
-L)S .
-L)G .
-L)G .
-L)T .
-L)T .
-L)P
-L)P
-L)S
PP-Statistic Intercept Lag The Sustainability of Fiscal Policy and Deficit Budget A (Muhammad Zilal Hamzah & Abd.
Ghafar b.
Ismai.
Table 7: (Continue.
Country Guyana Indonesia Jordan Malaysia Oman Pakistan Siera Lyon Tunisia Variable .
-L)G .
-L)G .
-L)T .
-L)T .
-L)P .
-L)P .
-L)S .
-L)S .
-L)G .
-L)G
-L)T
-L)T
-L)P
-L)P
-L)S
-L)S
-L)G
-L)T
-L)T
-L)P
-L)S
-L)G
-L)G
-L)T
-L)T
-L)P
-L)S
-L)G
-L)T
-L)P
-L)S
-L)G
-L)G
-L)T
-L)P
-L)S
-L)G
-L)G
-L)T
-L)T
-L)P
-L)P
-L)P
-L)S
-L)G
-L)T
-L)P
-L)P
-L)S
PP-Statistic 792937*** 877956*** 826197*** Intercept Lag Jurnal Ekonomi Pembangunan Vol.
10 No.
Desember 2005 Hal: 185 Ae 202 The results of the cointegration test are reported in table 8 and 9.
Cointegration test for Bahrain.
Jordan.
Oman, dan Pakistan shows that there are cointegration relationship in a set variables: public expenditures (LG), taxes (LT), and seigniorage rate (LS) and also in a set variables: public expenditures (LG), taxes (LT), and general price rate (LP).
This finding can explain that current expenditures are equal with current revenues which come from taxes and seigniorage.
ThatAos mean in the long run, government expenditures will not influence the government revenues negatively.
Also fiscal and monetary policy run in synchronization.
The positive relationship between tax and government expenditures shows that the increasing in government expenditures will increase the tax.
The cointegration test for Guyana and Tunisia shows that there are no cointegration relationship in a set variables: public expenditures (LG), taxes (LT), and seigniorage rate (LS) but there are cointegration relationship in a set variables: public expenditures (LG), taxes (LT), and general price rate (LP).
This finding can explain that current expenditures are not equal with current revenues from taxes and seigniorage.
ItAos also implies that, in the long run, government expenditures will influence the gov- ernment revenues negatively but fiscal and monetary policy run in synchronization.
While, the cointegration test for Indonesia and Sierra Lyon shows that there are no cointegration relationship in a set variables: public expenditures (LG), taxes (LT), and seigniorage rate (LS) and also in a set variables: public expenditures (LG), taxes (LT), and general price rate (LP).
This finding can explain that current expenditures are not equal with current revenues from taxes and seigniorage.
Therefore, in the long run, government expenditures will influence the government revenues negatively.
Also fiscal and monetary policy do not run in synchronization.
The cointegration test for Malaysia shows that there are cointegration relationship in a set variables: public expenditures (LG), taxes (LT), and seigniorage rate (LS) but there are not cointegration relationship in a set variables: public expenditures (LG), taxes (LT), and general price rate (LP).
This finding can explain that current expenditures are equal with current revenues from taxes and seigniorage.
Hence, in the long run, government expenditures do not influence the government revenues negatively.
Also fiscal and monetary policy do not run in Table 8: Cointegration Test of Budget Constraint Country Bahrain Cameroon Guyana Indonesia Jordan Malaysia Oman Pakistan Siera Lyon Tunisia Maximum Eigenvalue Statistic Test Null ( r = 0 ) Null ( r O 0 ) Trace Test Statistic Test Null ( r = 0 ) Null ( r O 0 ) The Sustainability of Fiscal Policy and Deficit Budget A (Muhammad Zilal Hamzah & Abd.
Ghafar b.
Ismai.
Table 9: Cointegration Test of Fiscal and Monetary Policy Synchronization Country Bahrain Cameroon Guyana Indonesia Jordan Malaysia Oman Pakistan Siera Lyon Tunisia Maximum Eigenvalue Statistic Test Null .
= .
Null .
O .
CONCLUSION In this paper, the government budget constraint is the key element of the fiscal policy sustainability analysis and also the starting point to derive analytical formulations suitable for empirical testing.
Through stationarity test for the of public debt and budget deficit and descriptive analysis of government revenues, expenditures, and taxes, an attempt was made to assess the sustainability of fiscal policy in some muslim countries, for the 1971Ae2000 period.
The Trace Test Statistic Test Null .
= .
Null .
O .
stationarity of the level difference of the public debt and budget deficit is a sufficient condition for fiscal policy sustainability.
The cointegration results show that, first, in Bahrain.
Jordan.
Oman, and Pakistan, the budget constraint has cointegration relationship in the long run.
The fiscal and moneter policy could also be synchronizely applied.
Second, in Indonesia and Sierra Lyon, neither budget constraint nor fiscal and monetery policy have cointegration relationship.
REFERENCES