CAUSAL IMPACT OF PUBLIC REVENUES AND PUBLIC EXPENDITURES IN REPUBLIC OF MACEDONIA
CAUSAL IMPACT OF PUBLIC REVENUES AND PUBLIC EXPENDITURES IN REPUBLIC OF MACEDONIA

Summary/Abstract: Analyzing the relationship between public revenues and public expenditures is vital for establishing appropriate fiscal policy crucial for appreciating the consequences of unsustainable fiscal deficits and as a result in addressing such imbalances due to the fact that fiscal policy is important tool for promoting price stability and sustainable growth. The main purpose of this paper is to investigate the causal relationship between public expenditures and public revenues in the case of Republic of Macedonia, conducted through monthly data for the time period from 2000 to 2015, by using Granger causality and Vector Error Correction Model (VECM) tests methodology. Data properties were analyzed to determine their stationary by using Augmented Dickey- Fuller (ADF) and Phillips Perron (PP) test for unit root. Additionally, in order to test the causality between the series of public revenues and public expenditures, it's necessary to verify if the two series are cointegrated there for Johansen test for co-integration is implemented. Moreover, for modelling variables in a manner that conquest in severable characteristics of its time series, we use SIC, AIC and HQIC to properly define lag structure of the series. Although plenty of empirical research is available on revenue and expenditure relationship yet there is no consensus about the causal link between these variables. Due to the available theoretical and empirical findings regarding the causal link between public revenues and expenditures both in developed and developing countries, an existing consensus regarding the nexus of these variables is not found so far. Moreover, based on the empirical side of causal link between public revenues and expenditures, there is no a discernable pattern among countries, thus demonstrating country specific analysis results. Despite the significance of a proper understanding of relationship between public expenditure and revenue in formulating fiscal policy, there is scanty empirical study for the case of Macedonia.

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