PANEL GMM ANALYSIS OF THE IMPACT OF FACTORS ON FISCAL DEFICIT IN CENTRAL ASIA AND THE CAUCASUS COUNTRIES
DOI:
https://doi.org/10.5281/zenodo.21177637Abstract
The article investigates the dynamic interplay between public debt, fiscal deficits, and institutional quality
across eight Central Asian and Caucasus economies (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan, Armenia,
Azerbaijan, and Georgia) over the period 2000-2024. Motivated by persistent endogeneity concerns in the debt-growth literature
– including reverse causality, omitted variable bias, and the dynamic panel bias identified by Nickell – the study employs a twostep
System Generalized Method of Moments (GMM) estimator with the Windmeijer finite-sample correction. The empirical
specification models fiscal deficit dynamics as a function of lagged fiscal balances, public debt-to-GDP, institutional quality
(drawn from the Worldwide Governance Indicators), and a battery of macroeconomic controls. Baseline results indicate that the
lagged fiscal deficit coefficient is statistically insignificant and unstable across specifications, while the public debt coefficient is
positive but imprecisely estimated. Subperiod analysis reveals temporal instability in the debt-deficit relationship, shifting from
negative (pre-2008) to positive (post-2008). Diagnostic tests reveal a persistent overidentification problem (Hansen J p-value of
1.000 in all specifications) attributable to the unusually small cross-sectional dimension (N = 8) relative to the time dimension
(T = 25) – a panel structure for which System GMM is not optimally suited. The paper concludes that institutional reforms are
likely complements to, rather than substitutes for, numerical fiscal rules, while cautioning that the present findings should be
treated as suggestive pending validation on a larger country sample or an estimator better matched to this panel’s dimensions.
Keywords
public debt; fiscal deficit; institutional quality; System GMM; Central Asia; Caucasus economies JEL Classification: C23, H62, H63, O43References
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