Optimal Fiscal and Price Stability in Germany: Autoregressive Distributed Lags (ARDL) Cointegration Relationship

Abstract

The impact of fiscal policy measures in a managed fixed exchange rate system were questioned in this study, to evaluate the extent of Fiscal Policies measure using quarterly time series data for Germany,for the period ranged between1991q1 to 2017q4. The study shows that, utilization of fiscalstrategies for economic growth by examining tax revenue, public debt and consumer price index. The Autoregressive Distributed Lag (ARDL) and OLS model were employed to establish co-integration and causal relationship among the variables respectively. The choice of ARDL is considered due to thefact that the parameters are not at uniform stationarity; Three of the variables are I(1) and one is I(0) from both ADF and PP. Numerous tests were employed to identify the stability, homoscedasticity andLM Test for the variables. Breusch Godfrey LM test and heteroskedasticity test are applied, respectively. The results shows that, there is existence of positive and negative causality amongst real GDP and tax revenue to CPI and tax revenue cause total public debt positively in Germany similarly, total public debt positively cause real GDP in short-run. Only one bidirectional exist between CPI and Total Public Debt, three unidirectional occurred between Tax revenue and real GDP, Total public debt and real GDP and CPI and Total public debt.This shows the evidence of higher tax rate leading to inflation and more public debt in the country. The researchers suggest that, there is need for the Germany's expansionary fiscal policy stance with combination of monetary policy which wills helps to contribute to the rapid growth of the economy.