Fiscal Reaction Function and Macroeconomic Shocks: Evidence from Developing Countries

Fiscal Reaction Function and Macroeconomic Shocks: Evidence from Developing Countries | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Fiscal Reaction Function and Macroeconomic Shocks: Evidence from Developing Countries Elwaleed Ahmed Talha This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-7378610/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract This study investigates the fiscal reaction functions of 142 developing countries over the period 2000–2024 using a Panel Structural Vector Autoregression (PSVAR) framework. It examines how fiscal policy responds to public debt and a range of macroeconomic shocks. The results indicate that the primary fiscal balance generally increases in response to rising public debt, reflecting a countercyclical effort to preserve debt sustainability. In contrast, fiscal policy tends to exhibit procyclical behavior in response to positive commodity price and output shocks, while responding countercyclically to inflation and interest rate shocks. These patterns suggest that, although many countries adjust their fiscal stance to rising debt, the scale and timing of such adjustments vary considerably, driven by country-specific institutional and economic conditions. Evidence of fiscal fatigue at elevated debt levels highlights the danger of persistent deficits, where delayed or insufficient adjustments erode fiscal space and threaten long-term sustainability. The findings underscore the need for credible, well-designed fiscal rules that combine flexibility to accommodate economic cycles with sufficient rigor to maintain fiscal discipline. Jel: E10 E62 H63 Macroeconomics macroeconomic fiscal policy debt sustainability Full Text Additional Declarations The authors declare no competing interests. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. Our growing team is made up of researchers and industry professionals working together to solve the most critical problems facing scientific publishing. Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-7378610","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":500843996,"identity":"2053e902-8f1b-4710-bddd-ae4883081624","order_by":0,"name":"Elwaleed Ahmed Talha","email":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAZAAAAAyAQMAAABI0h/eAAAABlBMVEX///8AAABVwtN+AAAACXBIWXMAAA7EAAAOxAGVKw4bAAAA70lEQVRIiWNgGAWjYDACdiB+wMDA2MDAA2Sx2UBE8AJmIE5AaEmDiJCi5TBhLfzMPIYfEipsZBvYzx7d8KHsvDw/MwPjh485uLVINvMYSyScSTNu4MlLuznj3G3Dmc0MzJIzt+HWYnCYd4NEYtvhxAaGHLPbvG23GTccZmBj5sWjxf4w7+Yfif/+JzbwvzG7/bftnD1BLQZAWYnEhgOJDRJAWxjbDiQS1CJxmP+bRcKxZOM2iTdmN3vOJSfPbGZsxusX/va25Bsfauxk+/lzzG78KLOz7WdvPvjhIx4tcMCGYALjaBSMglEwCkYBZQAAdcxQurjxxSkAAAAASUVORK5CYII=","orcid":"","institution":"","correspondingAuthor":true,"prefix":"","firstName":"Elwaleed","middleName":"Ahmed","lastName":"Talha","suffix":""}],"badges":[],"createdAt":"2025-08-15 05:47:19","currentVersionCode":1,"declarations":{"humanSubjects":false,"vertebrateSubjects":false,"conflictsOfInterestStatement":false,"humanSubjectEthicalGuidelines":false,"humanSubjectConsent":false,"humanSubjectClinicalTrial":false,"humanSubjectCaseReport":false,"vertebrateSubjectEthicalGuidelines":false},"doi":"10.21203/rs.3.rs-7378610/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-7378610/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":89251146,"identity":"37bbb582-c62a-4071-890f-abe61dc15f00","added_by":"auto","created_at":"2025-08-18 03:39:11","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":557741,"visible":true,"origin":"","legend":"","description":"","filename":"manuscriptSSRN.pdf","url":"https://assets-eu.researchsquare.com/files/rs-7378610/v1_covered_5990fd88-ae8f-4530-90f9-2a1c87c77a8a.pdf"}],"financialInterests":"The authors declare no competing interests.","formattedTitle":"\u003cp\u003eFiscal Reaction Function and Macroeconomic Shocks: Evidence from Developing Countries\u003c/p\u003e","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":true,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":true,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"macroeconomic, fiscal policy, debt sustainability","lastPublishedDoi":"10.21203/rs.3.rs-7378610/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-7378610/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eThis study investigates the fiscal reaction functions of 142 developing countries over the period 2000–2024 using a Panel Structural Vector Autoregression (PSVAR) framework. 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