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The Effectiveness of Fiscal Policy on Economic Growth in South Africa: An Empirical Analysis

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Submitted:

13 January 2022

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14 January 2022

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Abstract
The study uses annual time series data from the South Africa Reverse Bank (SARB) from 1980 to 2020 to examine the effectiveness of fiscal policy on economic growth in South Africa. The Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests, as well as the Johansen Co-integration test, Granger causality test, and Vector Auto-Regression (VAR) method, were used in the study. Real GDP per capita (RGDP) is used as proxy of economic growth and gross fixed capital formation (GFCF), government expenditure (GEXP) and government deficit (GOVD) as the proxies of fiscal policy. The ADF test results show that all variables are stationary at the first difference, with the exception of GFCF and GEXP, which are stationary at I(0), whereas the PP test results show that all variables are stationary at I(1), with the exception of GEXP, which is stationary at I(0). At Maximum Eigenvalue, the four variables are not cointegrated. The findings of the Granger causality test demonstrated a unidirectional causation from GOVD to RGDP, as well as a bidirectional causality from RGDP to GFCF and GEXP. Error Correction Model Estimated using VAR shows that GFCF, GEXP have positive effect on RGDP whereas GOVD has a negative effect on RGDP in the short run. The findings also presented that the VAR's residuals are homoscedastic, which means they are normally distributed and have no serial correlation.
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Subject: Business, Economics and Management  -   Economics
Copyright: This open access article is published under a Creative Commons CC BY 4.0 license, which permit the free download, distribution, and reuse, provided that the author and preprint are cited in any reuse.
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