Discretionary fiscal policy in Vietnam over business cycles and inflation, 1990-2015

Abstract

This study examines the cyclicality of discretionary fiscal policy in Vietnam using annual time series from 1990 to 2015. The change in cyclically adjusted balance (fiscal impulse) is utilized as the indicator of active fiscal action, while the output gap as the proxy for business cycle. Evidence shows discretionary fiscal policy follows a procyclical trend over business cycles, but reversed since 2008. In addition, discretionary fiscal policy is more procyclical during recessions than in booms. Finally, discretionary fiscal policy tends to react to inflation in a stabilizing way, i.e., contractive after inflation surges and expansive after inflation dives. This suggests that Vietnam has been using discretionary fiscal policy to stabilize general price level rather than output cycles.