Abstract

This study has a major motivation to empirically find the fundamentals of budget deficit instability for the period 1984 to 2016 using unbalanced panel data set of 89 countries. This study has tried to empirically evaluate the economic and political sources of budget deficit volatility. This study first estimate the regression model by considering the panel characteristics of the data set and estimate the fixed effects and random effects models. Finally Hausman test is used to make a decision for the best fit model. In the second stage to control for the potential endogeneity of economic political and institutional variables that may influence budget deficit volatility this study has also used the system generalized methods of moments (GMM).The current study concludes that corruption, conflicts and political stability are important indicators of budget deficit both for sample countries. The outcome indicates that the budget is more stable with the higher level of political stability. The Budget deficit has more fluctuations if higher level of corruption coexists. So to avoid high and unstable deficit attention should be diverted to improve institutional setup of the economy.

Authors and Affiliations