Fiscal policy and economic growth nexus: an empirical investigation from Somalia

Abstract Somalia’s high dollarization limited the role of monetary policy, thus making fiscal policy the main economic management tool for the government. Therefore, we adopted this finding to examine asymmetric impact of fiscal policy on economic growth in Somalia. The study adopted annual time series data covering from 1970-2019 and NARDL as estimation method. The result revealed the presence of cointegration among the variables. In the long-run the result shows that both increase and decrease of government expenditure has significant positive effect on economic growth but decrease in public expenditure has stronger effect on economic growth compared to government expenditure increase. The result also shows that decrease and increase of government expenditure has significant positive effect on economic growth in the short-run, although increase in government expenditure has stronger effect economic growth compared to decrease in government expenditure. the result outperformed various diagnostic test. Based on the result, the study recommends to policy makers to consider fiscal policy specifically public spending as an important channel of boosting economic growth. in addition, the study recommends, policy makers to channel public spending to the productive sectors of the economy and promote fiscal transparency as a means of realizing fiscal policy objectives.