Fiscal Theory of Price Level: A Panel Data Analysis for selected Saarc Countries

I compare the two alternative paradigms of business cycles for the case of the Romanian eThis paper examines the validity of fiscal theory of price level in the five selected SAARC countries, namely Bhutan, India, Nepal, Pakistan and Sri Lanka by using panel data analysis for the period 1990-2009. Specification tests, i.e. F-test and Hausman test indicate that the fixed effect model can be considered as the best model to examine the relationship between budget deficit and price level. Empirical findings also show that budget deficit is significant and negatively related with the price level in pooled least square, while fixed and random effect model explain that the budget deficit has no role in explaining the given scenario. The GDP per capita is positively and highly significant in all of the models, while openness is explaining its role in reducing the price level in the specified set of countries. The additional robustness tests are also performed to test the validity of results of the model. After removing the variable, i.e. GDPPC from the fixed effect model, the budget deficit (BD) significantly impacts on the SAARC price level. Our findings substantiate that fiscal theory of price level is not valid in the selected SAARC countries. This study opens new dimensions for policy planners, government agencies, NGO’s and other donor agencies working in the SAARC region.