Nonlinear Effects of the Financial Crisis on Economic Growth in Asian Countries: Empirical Evaluation with a PSTR Model

Abstract

The objective of this paper is to evaluate the effectiveness of fiscal policy in emerging countries in periods of crisis. We study the effect of fiscal policy on economic activity distinguishing between periods of recession and expansion periods. Our goal will be to explore the nonlinear effect of fiscal policy in Asian emerging countries on the activity during periods of crisis. We use the PSTR model. This model is used on annual data for the period 1990-2013 for a sample of 8 emerging Asian countries. Our main findings are the following: First, this study confirmed that the PSTR model is more robust comparing it to a simple linear model. Indeed, it can highlight the asymmetric effect of fiscal policy on economic activity. Second, the nonlinearity of fiscal policy is explained by the phases of cycles and the level of public debt.