The effectiveness of fiscal policy contributions from institutions and external debts

University of Economics Ho Chi Minh City Journal of Economic Development ********** The Project: PROMOTING THE ENHANCE QUALITY OF THE ENGLISH-LANGUAGE VERSION OF JOURNAL OF ECONOMIC DEVELOPMENT, INTENDED AS A SCOPUS-LISTED JOURNAL Topic: THE EFFECTIVENESS OF FISCAL POLICY: CONTRIBUTIONS FROM INSTITUTIONS AND EXTERNAL DEBTS CS- 2017-01TĐ-03 Contents CHAPTER 1: INTRODUCTION .3 1.1 Abstract 1.2 Motivations 1.3 Methodology CHAPTER 2: LITERATURE REVIEWS .7 2.1 The effectiveness of fiscal policy 2.1.1 The theoretical framework of fiscal policy’s effectiveness 2.1.2 The empirical works 2.2 The institutions and the effectiveness of fiscal policy 13 2.3 The external debt burden and the effectiveness of fiscal policy 17 CHAPTER 3: METHODOLOGY AND DATA 21 3.1 Methodology 21 3.2 Data 25 CHAPTER 4: RESULTS AND DISCUSSIONS 29 4.1 The institutions and the effectiveness of fiscal policy 29 4.2 The external debt and the effectiveness of fiscal policy 32 4.3 Robustness check 34 CHAPTER 5: CONCOLUSIONS 39 Acknowledgement 41 References 42 CHAPTER 1: INTRODUCTION 1.1 Abstract The effectiveness of fiscal policy is an interesting field in literature of macroeconomics In this paper, we use panel data from 2002 to 2014 from 20 emerging markets to investigate the effects of fiscal policy on economic growth under contributions from the differences in institutions and external debt levels By using GMM estimators for unbalanced panel data, our results show positive effects of fiscal policy on economic growth across emerging markets in the examined periods Notably, the improvement in institutions promotes higher crowding-in effects of fiscal policy In addition, this paper finds interesting evidences that the external debt has nonlinear effects on economic growth, whereas the heterogeneous effects of fiscal policy on economic growth as positive effects in low indebted level and negative effect in high indebted level may explain the mechanism of this non-linear relationship The results have significant contributions to the literature and useful implications for authorizers in promoting sustainability of the economy The authorizers are strongly recommended to focus on improving the institutional quality that not only boosts the effectiveness of fiscal policy in general, but also solves the dilemma of high indebted countries when the fiscal policy loses the effectiveness 1.2 Motivations Fiscal policy is conducted by government through taxation and public spending with the aims at sustainable development for the economy So, fiscal policy and its impacts on the economic growth tend to be at the center of macroeconomic and political debates The field of the effectiveness of fiscal policy has re-highlighted in light of the 2008 global financial crisis with the new contemporary drivers such as external debt (Ruščáková & Semančíková, 2016) Since the complexity of the process by which fiscal policy is conducted is not fully captured, that why different theories provide different answers regarding macroeconomic effects of fiscal policy and arguments about the suitability and real effects of government expenditures on economic growth are still interesting field of study (Bouakez, Chihi, & Normandin, 2014) Whereas, the main question in the literature of the fiscal policy’s effectiveness is that whether fiscal policy presents crowding-out and/or crowding-in effects in a country and what its drivers In fact, many researchers try to find evidences with the parallel existence of both and mixed conclusions (see Ahmed and Miller (2000), Heutel (2014), Şen and Kaya (2014)) The studies of the effectiveness of fiscal policy have developed and conducted in long history through many economic growth models Many studies use versions of the Solow (1956) model to study the dynamic effects of taxation on economic growth, while other studies use neoclassical growth model (Easterly & Rebelo, 1993) In this regard, researchers argue that the effects of government expenditures on economic growth follow two different regimes including crowding-out effects and crowding-in effects The neo-classical theory states that government expenditure crowds out private investment then has negative impacts on economic growth While, Keynesian view, in contrast, states that government expenditure stimulates private investment in the case of un-fully employment, which then has positive impacts on economic growth, especially in developing countries (Ahmed & Miller, 2000) Moreover, the effects of fiscal policy on economic growth is driven by many factors such as the employment in the economy, the transparency of government, the composition of government expenditures, or even the government size (see Akanbi (2013), Arestis (2011), Kasselaki and Tagkalakis (2016), Hemming, Kell, and Mahfouz (2002)) In empirical literature about the determinants of fiscal policy’s effectiveness, there are, in fact, some studies that consider the role of institutional framework such as corruption situation, economic freedom, democracy (see Baldacci, Hillman, and Kojo (2004), Martinez-Vazquez, Boex, and Arze del Granado (2007), Nelson and Singh (1998)) Meanwhile, the burdens of external debt on the sustainability of fiscal policy are also concerned For instance, Amato and Tronzano (2000) document that a restrictive fiscal stance, a lengthening of average debt maturity and an increase in the share of foreign-denominated debt are crucial to stabilize the exchange rate in Italia Bal and Rath (2014) find that central government debt, total factor productivity (TFP) growth, and debt-services are affecting the economic growth of India in the short-run and they recommend that Indian government should follow the objective of inter-generational equity in fiscal management over the long term in order to stabilize debt-GDP ratio Which means that the external debt may influence the effectiveness of fiscal policy Recent study, Doğan and Bilgili (2014) examine the relationship between external indebtedness and growth variables in Turkey They find that external borrowing has negative impact on growth both in regime at zero and regime at one, but the public debt has higher negative effects on economic growth and development Precisely, they conclude that that the economic development and borrowing variables not follow a linear path 1.3 Research questions In fact, there are very early studies about the effects fiscal policy such as Smith (1937), Bailey (1971), Buiter (1977), and Arestis (1979), and many recent studies try to investigate the impacts of both government expenditures on private investment and especially economic growth However, the debate with regard to the effectiveness of fiscal policy is still ongoing (Bouakez et al., 2014; Heutel, 2014; Kameda, 2014a; Şen & Kaya, 2014) Precisely, the literature of fiscal policy is lacking of the studies about the effectiveness of fiscal policy under the contributions from the institutions and external debts in a comprehensive work Therefore, this study is conducted under the motivations from the study of Doğan and Bilgili (2014) by investigating the effectiveness of fiscal policy on economic growth under the relationships with the changes in the institutions and the burdens of external debt in the context of 20 emerging markets including Argentina, Bangladesh, Brazil, Bulgaria, China, Colombia, Egypt, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Romania, Russia, South Africa, Thailand, Turkey, and Vietnam In which, this study goes to answer two main questions: Question 1: the institutions enhance the effectiveness of fiscal policy in emerging market economies? Question 2: does fiscal policy have heterogeneous effects under the difference levels of external debt? 1.4 Methodology In this study, we achieve our objectives by implementing following strategy We firstly examine the impacts of fiscal policy on economic growth through the modified model of endogenous growth theory by incorporating government expenditure and controlling other common drivers of economic growth including capital, labor, financial development, technology, economic openness (trade and capital flows) Then, the institutional factors including government effectiveness, regulatory quality, and control of corruption are incorporated, respectively, to test the impacts of institutions on economic growth Next, we use the interaction terms between government expenditure and institutions to examine the effectiveness of fiscal policy under the associations of institutional framework We then estimate the growth model with the explanatory variables including both external debt level to GNI and its square to examine the non-linear relationship between external debt and economic growth After that, we divide our data into two sub-samples (the low indebted countries and high indebted countries) to investigate the effectiveness of fiscal policy under two regimes At last, we use GDP per capita growth rate in replacing GDP growth rate to check robustness of results By doing this strategy, we believe that this study has significant contributions to both theory and practice Firstly, this study has contribution to the literature of fiscal policy effectiveness and fiscal indebtedness by adding the effects of government expenditures under the external debt level and the associations with institutional quality The results find significant evidences that the institutions enhance the effectiveness of fiscal policy Notable, the external debt level presents the non-linear relationship with economic growth through the mechanism that the fiscal policy has the heterogeneous effects on economic growth: the crowding-in effect in low indebted level and crowding-out effects in high indebted one Secondly, this study has significant implications for the authorizers in implementing the long-term sustainable fiscal policy in line with borrowing policy and the solutions for the high indebted countries that face to the dilemma of ineffective fiscal policy This study is structured as following Chapter focuses on our motivations of this study Chapter presents literature reviews and then our arguments on the effectiveness of fiscal policy under the contributions from institutions and external debt Methodology and data are provided in Chapter Chapter presents the results and our discussions The concluding remarks are discussed in Chapter CHAPTER 2: LITERATURE REVIEWS 2.1 The effectiveness of fiscal policy 2.1.1 The theoretical framework of fiscal policy’s effectiveness In the literature of fiscal policy effectiveness, it is natural place to start with the Keynesian theory In Keynesian model, the sticky price and excess capacity are assumed that contraries to the classical economics, so that aggregate demand determines output and government expenditures have a multiplier effect on aggregate demand and output (Coddington, 1976) Therefore, Keynesian economics call for the government intervention and incorporate government expenditure into the aggregate demand function The Keynesian views argue that there is very rare case for an fully employed economy, thus the sensitivity of investment to interest rates would be low and then an increase in interest rates due to expansionary fiscal policy would be minimal, the government expenditure, in turn, has positive impacts on economic growth (O’Hara, 2011; Şen & Kaya, 2014) This view is also called as the crowding-in effects of fiscal policy, where the government should undertake the expenditure in the recession time to cover the lack of private consumption and investment (Jahan, Mahmud, & Papageorgiou, 2014) However, some of extensions in the line of Keynesian model allow for crowding-out effects of fiscal policy, which means the expansion of government expenditure crowds out the private demand and then influences negatively on output, through the changes in interest rates and exchange rate in the case of open economy With the assumption that the private investment is negative impacted by the increase in interest rate, the expansionary fiscal policy that backed by borrowing leads to the lower private investment due to higher interest rates Moreover, the higher interest rates due to the expansionary fiscal policy attract capital flows in the case of open economy that appreciate exchange rate and then results the deterioration in current account (see Mundell (1963), Fleming (1962)) The neo-classical economics address the shortcomings of Keynesian economics on its lack of microeconomic foundations The neo-classical views focus on the determination of goods, outputs, and income distributions in markets through both supply and demand sides by adding the assumption of utility maximization of income-constrained individuals and firms under the boundary of factors in production and available information (see Gaffney (1994), Goodland and Ledec (1987), Davis (2006)) In which, the neo-classical economics raise the rational expectations in comparing to the adaptive expectations in Keynesian economics This brings forward adjustments in economic factors that occur more progressively so that fiscal policy matters in not only long-term but also short-term period And the permanent fiscal changes can lead to the crowding-out effects since private sectors expect the persistent changes in interest rates and exchange rates in this case (see Buiter (1977), Arestis (1979), Mundell (1963), Fleming (1962)) In addition to neo-classical economics, the Ricardian view that is based on Ricardian equivalence theorem assumes that the individuals are forward-looking in the current activities, which is also in contrasting with the Keynesian economics view as individuals rely on current income (see Barro (1988), McCallum (1984)) In Ricardian view, individuals anticipate a present tax cut as higher government borrowing that turns into the higher taxes in the future so that there is no change in permanent income This condition in along with the assumptions of no liquidity constraints and perfect financial markets lead to no change in private consumption in general (Barro, 1974) Thus, Ricardian view suggests neither crowding-in nor crowding-out effects of fiscal policy (Arestis, 2011; Şen & Kaya, 2014) However, if governments change lump-sum taxes for the fiscal policy, the features of progressive taxes will have impacts on permanent income and then the aggregate demand and output As a result, the effectiveness of fiscal policy most likely depends on how it is paid in the future and the productivity of government expenditures (Hemming et al., 2002) As a brief summary, the government expenditure, as according to the Keynesian views, is needed to cover the lack of consumption in private sectors, which means the fiscal policy presents a positive effect on economic growth However, the Keynesian view is lacked of considering other factors such as institutional environment or debt burden on the effectiveness of fiscal policy The neo-classical economics views further explains the effectiveness of fiscal policy in the some manner relationship with the public debt In neo-classical views, today’s individuals think that the existing budget deficits due to the expansionary fiscal policy to increase the consumption level have to pay back through taxes for future generations While, government expenditure is less productive than private investment thus the increased output as a result of the debt financed government expenditure does not fully offset the negative effect due to the crowding-out to private investment on output Therefore, the fiscal policy presents crowding-out effects at the end Meanwhile, the Ricardian view suggests that fiscal policy presents neither crowding-in nor crowding-out effects since private investment and government spending are considered to behave independently from each other Where, the increase in government spending is anticipated to be accompanied by a rise in taxes in the future, thus government expenditure financed by debts is expected to be repaid by revenue generated through taxes levied in the future As the result, interest rates and private investment remain unchanged All above economic views require assumptions to be presence such as no liquidity constraints, perfect financial markets in Ricardian equivalence However, these assumption are usually un-existed thus the significance of theories is questioned in both theory and practice (Haque & Montiel, 1989) Furthermore, there are some cases that the effectiveness of fiscal policy is explained by all of these views For instance, if government is restricted by the fiscal rules to balance the fiscal budget in the long run, thus individuals may partial adjust their behaviors if they have short-term horizon which presents the presence of both Ricardian and neoclassical views In the same idea, if the current path of government debt is not sustainable and future tax increases will be required to lower the debt, the Ricardian view may be presence in expansionary fiscal policy seemingly with the Keynesian view which depends on the level of public debt (Sutherland, 1997) Or, if the government expenditure is in line of an upwardtrending stochastic process that individuals believe a sharply fall when it approaches a specific “target point”, there will be a non-linear relationship between private consumption and government expenditure (Bertola & Drazen, 1991) Therefore, the argument of a non-linear relationship between fiscal policy and economic growth makes sense in literature However, the literature needs the explanations for the mechanism and empirical evidences 2.1.2 The empirical works In fact, many previous studies have investigated the effects of fiscal policy in many countries, especially in advanced countries such as US, Japan, European area In which, empirical works usually focus on the relationships between fiscal policy, interest rates, private investment, exchange rates, and the existence of Ricardian equivalence with three main streams including the estimation of fiscal multiplier from macroeconomic model simulations, the lesson studies of fiscal policy, and the determinants of fiscal multipliers (Hemming et al., 2002) Hemming et al (2002) summary that the fiscal policy presents mostly with positive multipliers, it means that government expenditure has positive impacts on economic growth in the short run See Hemming et al (2002) for the more detail summary In addition, they find few evidences of negative short-term multipliers They also document that the spending changes have higher fiscal multipliers than the tax changes However, the long-term fiscal multipliers, in contrasting to the short-term, are generally smaller and reflect the crowdingout effects of government expenditures Recently, Afonso and Strauch (2007) find that the European fiscal policy in 2002 makes market swap spreads response in mostly around five basis points or less Similarly, the study of Kameda (2014a) finds that a percentage point increase in both the projected/current deficit-toGDP ratio and projected/current primary-deficit-to-GDP ratios raises real 10-year interest rates by 26–34 basis points that implies a crowding out effect of Japanese fiscal policy Kameda (2014b) also studies the determinants of the effectiveness of fiscal policy and documents that the diffusion index of the attitudes of financial institutions have a definite impact on fiscal expansion effects In particular, the demand-enhancing effects of government expenditure should be nonKeynesian effects if the existence of liquidity-constrained households when banks’ attitude toward lending is tight and the financial condition of the government is bad Bhattarai and Trzeciakiewicz (2017) use a DSGE analysis to examine the fiscal policy in UK They note the highest GDP multipliers for government consumption and investment in the short-run, whereas capital income tax and public investment have long-run crowding-out effect on GDP Moreover, they emphasize that the effectiveness of fiscal policy decreases in a small open-economy scenario Table Some additional evidences of fiscal policy’s effectiveness Study Nguyen and Turnovsky (1983) Sample Australia, Empirical evidences Crowding-out effects UK, US D Cohen and Clark (1985) US Crowding-out and crowding-in effects Kormendi and Meguire (1985) 47 No relationship between government spending countries and economic growth Bradley (1986) US Crowding-out effects Engen and Skinner (1992) 107 Crowding-out effects in the balanced –budget countries increase the government expenditure Table 13 Government expenditure and economic growth (GDP per capita growth rate) Model Dep var: Gdp per capita growth Gdppcg(-1) Gdppc(-1) Capg Popg Credit Patent Fdi Trade Govexg N No of Group AR(-2) test Sargan/Hansen test (16) (17) Coef 0.191*** -0.718*** 0.254*** -0.335*** 0.203 0.442*** 0.291*** 0.549* P-value 0.000 0.000 0.000 0.003 0.584 0.000 0.000 0.096 193 20 -0.92 16.03 0.359 0.248 Coef 0.150*** -0.620*** 0.250*** -0.427*** 0.268 0.382*** 0.368*** 0.270 0.125** 192 20 -0.53 15.99 P-value 0.005 0.000 0.000 0.001 0.480 0.003 0.000 0.418 0.049 0.593 0.250 Table 14 Institutions and economic growth (GDP per capital growth rate) Model Dep var: GDP per capita growth Gdppcg(-1) Gdppc(-1) Capg Popg Credit Patent Fdi Trade Govexg Goveff Regu Concor N No of Group AR(-2) test Sargan/Hansen test (18) Coef 0.123** -0.710*** 0.250*** -0.732 0.108 0.458*** 0.344*** 0.552 0.126* -0.567 192 20 -0.49 15.53 (19) P-value 0.024 0.000 0.000 0.130 0.808 0.004 0.002 0.207 0.054 0.160 0.621 0.275 Coef 0.097 -0.616*** 0.239*** -0.554*** 0.080 0.409*** 0.433*** 0.452 0.119* P-value 0.108 0.001 0.000 0.000 0.842 0.006 0.000 0.289 0.095 -1.042*** 0.006 192 20 -0.42 14.92 0.672 0.312 (20) Coef 0.065 -0.690*** 0.244*** -0.521*** 0.034 0.454*** 0.453*** 0.430 0.119* P-value 0.323 0.001 0.000 0.003 0.938 0.007 0.000 0.380 0.064 -1.272*** 192 20 -0.40 13.99 0.004 0.686 0.374 Table 15 Institutions, government expenditure and economic growth (GDP per capita growth) Model Dep var: GDP per capita growth Gdppcg(-1) Gdppc(-1) Capg Popg Credit Patent Fdi Trade Govexg Goveff Govexg*Goveff Regu Govexg*Regu Concor Govexg*Concor N No of group AR(-2) test Sargan/Hansen test (21) Coef 0.079 -0.723*** 0.223*** -0.564 0.057 0.434** 0.484*** 0.565 0.153 -1.743* 0.241* 172 20 0.19 17.50 (22) P-value 0.270 0.000 0.000 0.399 0.903 0.011 0.000 0.223 0.124 0.065 0.086 0.852 0.177 (23) Coef 0.030 -0.627*** 0.235*** -0.508*** 0.407 0.286** 0.593*** 0.330 0.116* P-value 0.649 0.000 0.000 0.000 0.143 0.014 0.000 0.321 0.074 -2.210*** 0.223*** 0.000 0.004 172 20 0.85 15.30 0.394 0.289 Coef 0.049 -0.736*** 0.227*** -0.496*** 0.149 0.407* 0.571*** 0.117 0.441** P-value 0.522 0.000 0.000 0.010 0.748 0.053 0.000 0.826 0.038 -3.275* 0.490* 192 20 -0.70 13.14 0.072 0.089 0.487 0.437 Table 16 External debt level and economic growth (GDP per capita growth rate) Model Dep var: GDP per capita growth Gdppcg(-1) Gdppc(-1) Capg Popg Credit Patent Fdi Trade Govexg Debt Debt^2 N No of group AR(-2) test (24) (25) Coef 0.178** -0.885*** 0.257*** -0.255** 0.149 0.589*** 0.386*** 0.225 0.060 0.028** P-value 0.012 0.000 0.000 0.048 0.644 0.001 0.000 0.621 0.558 0.050 172 20 0.44 0.662 Coef 0.176* -1.608*** 0.268*** 0.115 0.863 1.116*** 0.583*** -1.619 0.034 0.264*** -0.002** 172 20 0.86 P-value 0.052 0.000 0.000 0.689 0.246 0.000 0.000 0.154 0.638 0.004 0.012 0.390 Sargan/Hansen test 14.79 0.321 14.39 0.347 Table 17 Government expenditure and economic growth (GDP per capita growth rate) under two debt level regimes (26) countries with average debt40% Coef P-value 0.148* 0.076 -0.394* 0.061 0.195*** 0.000 -0.132 0.647 -1.483** 0.045 0.309 0.136 0.104 0.484 1.885** 0.019 -0.020 0.748 126 12 -0.29 0.772 27.10 0.133 Table 18 Institutions, government expenditure and economic growth (GDP per capita growth rate) under two debt level regimes Model Dep var: GDP per capita growth Gdppcg(-1) Gdppc(-1) Capg Popg Credit Patent Fdi Trade Govexg Goveff Regu Concor N (28) Group 0.025 -0.969*** 0.287*** -1.746** 0.402 0.465*** 0.130 1.352** 0.110 -1.075** 78 Group 0.142* -0.407* 0.194*** -0.145 -1.618** 0.340 0.111 1.969** -0.019 0.151 126 (29) Group 0.028 -0.808*** 0.288*** -1.670** 0.319 0.395*** 0.166 1.198** 0.114* Group 0.140 -0.615** 0.195*** 0.106 -2.049** 0.575* 0.135 2.314*** -0.081 -0.976* 0.805 78 126 (30) Group 0.032 -0.781*** 0.266*** -1.745*** 0.420 0.380*** 0.198 0.964 0.127* Group 0.133 -0.505** 0.191*** -0.175 -1.792** 0.491 0.123 2.096** -0.012 -1.394** 86 0.694 126 No of group AR(-2) test (pvalue) Sargan/Hansen test (p-value) 12 12 12 0.303 0.763 0.352 0.696 0.168 0.741 0.127 0.122 0.102 0.364 0.103 0.127 The estimation shows the robustness results in comparing with the previous models excepting for the impacts of population growth rate on economic growth However, the change in the effects of population growth on GDP growth rate and GDP per capita growth rate is easy to understand In the model of GDP growth rate, the growth in population has significant positive impacts on economic growth, the results are consistence with the economic growth theories where the increasing in labor factor contributing to the economic growth in total Meanwhile, the GDP per capita growth rate presents the growth of GDP in relationship with the growth of population so that the significant negative impacts of population growth on GDP per capita growth rate suggesting that the economic growth in emerging market economies needs to consider in relating with the population growth As a summary, the results are consistence and robustness for both GDP growth and GDP per capita growth models CHAPTER 5: CONCOLUSIONS The conditions for the effectiveness of fiscal policy are under debate in both literature and practice This is re-highlighted from the severe of the 2008 global financial crisis and the European debt crisis This study contributes to literature and practice by shedding the light on the contributions of institutions and external debt on the effectiveness of fiscal policy This study collects the annual data from World Governance indicators and World Development Indicators of Worldbank for 20 emerging markets in the period 2002-2014 to examine the effectiveness of fiscal policy in the relationships with institutional framework and external debt burden Applying the endogenous growth model with the common elements of economic growth including labor, capital, technology, credit, trade openness, and capital flow, we then incorporate the government expenditure to investigate the effective of fiscal policy As our most notable contributions, we examine the impacts of institutions on the effectiveness of fiscal policy through the interaction terms between government expenditure and institutional indicators including government effectiveness, regulatory quality, and control of corruption In addition, we examine the non-linear relationship between external debt and economic growth, where this relation is investigated more detail for its mechanism through the fiscal policy Through GMM estimators for panel data, the study presents some meaningful findings: Firstly, the fiscal policy presents the crowding-in effects in emerging market economies in the period of 2002-2014 This result confirms the important role of fiscal policy in the case of emerging market economies, it is also consistence with our arguments and theory of Keynesian views In fact, the emerging market economies present with the low level of capital accumulations, the low level of financial development so that the interest rates may not be too sensitive with the fiscal policy, while the fiscal policy is essential to build the basic infrastructure for the economic activities of private sectors Thus, the fiscal policy is effective in promoting economic growth Secondly, even the fiscal policy has positive effects on economic growth; the study finds interesting evidences that fiscal policy loses this effect in the case of high indebted countries The results have significant contributions to both theories and practice Whereas, the external debt creates constraints for the effectiveness of fiscal policy, especially in the case of high indebted countries This relationship may explain the mechanism for the non-linear relationship between external debt and economic growth Thirdly, we find evidences that the improvement in institutions boosts the effectiveness of fiscal policy This notable finding has very useful contributions to literature and implications for the practice in the case of emerging market economies In which, the institutions under aspects of government effectiveness, regulatory quality, and control of corruption enhance the positive impacts of government expenditure on economic growth at both level: GDP and GDP per capita In addition, the empirical results also suggest us essential measures for the government in dilemma of ineffective fiscal policy when they are in high indebted level that they should focus on the institutional improvement, which enhances the effectiveness of fiscal policy in one hand, it has positive impacts directly on economic growth on the other hand./ Acknowledgement The author wish to thank the Editors, Professor Su Dinh Thanh, for their many helpful comments and suggestions which greatly enhance the brevity and quality of this study I am grateful for the financial support from the Project on “Promoting the Enhance Quality of the English-Language Version of Journal of Economic Development, Intended as a Scopus-Listed Journal” of Journal of Economic Development and 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Precisely, the literature of fiscal policy is lacking of the studies about the effectiveness of fiscal policy under the contributions from the institutions and external debts in a comprehensive work Therefore,... CHAPTER 4: RESULTS AND DISCUSSIONS 29 4.1 The institutions and the effectiveness of fiscal policy 29 4.2 The external debt and the effectiveness of fiscal policy 32... 2.1 The effectiveness of fiscal policy 2.1.1 The theoretical framework of fiscal policy s effectiveness In the literature of fiscal policy effectiveness, it is natural place to start with the