Economic Reform, Fiscal Rules, and the Nonlinear Autoregressive Distributed Lag Bounds Test Model. Evidence from the United Arab Emirates

Abstract

Abstract The study demonstrates that UAE Vision 2021 was effective, evidenced by the outcomes of the historical growth accounting model and the nonlinear autoregressive distributed lag bounds test model. Additionally, the study finds, among other things, that during the UAE Vision 2021, a sudden change in fiscal policy, whether expansionary or contractionary, proved effective, particularly in the long run and that a sudden change in crude oil price has a limited impact on the economy; however, investment in physical capital showed mixed results. Moreover, the nonlinear autoregressive distributed lag bounds test model demonstrates the nonlinearity of the relationships between crude oil price, investment in physical capital, and fiscal policy vis-à-vis economic performance. The model demonstrates that crude oil price, fiscal policy, and investment in physical capital are cointegrated with economic performance, reverting to long-run equilibrium in the aftermath of a shock. Hence, the study recommends the adoption of fiscal rules, specifically targeting the structural primary balance. The targeting smooths the underlying commodity price, reduces procyclicality, improves sovereign wealth funds, and cushions the economy from external shocks.