This thesis is a collection of five essays in empirical
macroeconomics. The first paper evaluates the effectiveness of
fiscal policy in different economic environments. The results
show that, contrary to conventional wisdom, fiscal multipliers
are not necessarily smaller in countries relatively open to trade
and financial flows and operating under flexible exchange rates.
The relationship between the size of fiscal multipliers and the
three dimensions of openness — trade openness, capital
mobility, and exchange rate flexibility — hinges on the
response of the real exchange rate and the degree of monetary
policy accommodation, which underscores the importance of fiscal
and monetary policy interaction in understanding the fiscal
transmission mechanism.
The second paper examines the effects of an adverse oil price
shock in oil-exporting countries under alternative exchange rate
and fiscal policy arrangements. The results show that output and
government consumption fall, as expected, but the responses are
smaller and smoother in countries with flexible exchange rates
and oil funds. This highlights the shock-absorbing property of
flexible exchange rates and the macroeconomic stabilization role
of oil funds, making a case for oil exporters to adopt more
flexible exchange rates and establish oil funds as fiscal
buffers.
The third paper examines the roles of oil funds and institutional
quality in reducing fiscal procyclicality and macroeconomic
volatility in oil-exporting countries. The results show that oil
funds are effective in reducing fiscal procyclicality in
countries with high institutional quality. There is also a
reduction in the procyclical bias in countries with low
institutional quality but the evidence is less compelling.
Nonetheless, oil funds are associated with reduced volatility of
government consumption and the real exchange rate in countries
with low institutional quality. These findings demonstrate the
potency of oil funds in macroeconomic stabilization, but also
reinforce the importance of good institutions.
The fourth paper examines the conduct of fiscal policy in Brunei,
focusing on the cyclical patterns in government expenditure. In
spite of relatively large fiscal buffers in Brunei’s oil funds,
the results provide evidence of procyclical fiscal policy, which
exacerbates the business cycle. This behaviour is primarily
driven by procyclical current expenditure while capital
expenditure is largely acyclical. A key policy recommendation
would be to adopt clear fiscal rules to integrate the oil funds
into the country’s macroeconomic policy framework to delink
government spending from volatile oil revenue.
The fifth paper investigates the sources of macroeconomic
fluctuations in Brunei. The results show that oil price shocks
account for only a small proportion of output fluctuations while
productivity shocks have the largest share. Real exchange rate
movements are largely driven by demand shocks while monetary
shocks explain most of the variability in prices. Economic
policies should focus on productivity improvement and capital
investment to increase output in the long run, and the conduct of
fiscal policy should take into account the impact on real
exchange rate volatility
