How Fiscal Policy Affects Non-Oil Economic Performance in Azerbaijan?

The role of fiscal policy in promoting economic growth has been subject to many studies since its suggestion by Keynes who stated expansionary/contractionary impact of public expenditures/taxes. In this context, effectiveness of fiscal policy use to develop non-oil sector in resource rich economies should be studied. This paper investigates short- and long-run effects of budget expenditures and tax-related budget revenues (direct transfers from oil fund excluded) over non-oil GDP while controlling for oil price volatility and oil production in case of Azerbaijan. Autoregressive Distributed Lag Bounds Testing (ARDLBT) Approach to cointegration is employed for data covering 2000Q1-2015Q2. Estimation results theoretically consistent and statistically significant long-run effects of both budget expenditures and tax-related budget revenues. However, in the short-run, the effects are contrary to the theoretical expectations. Findings are useful for Azerbaijan fiscal policy makers especially in the current complicated nature of economic processes in the economy due to oil related challenges