The dynamic impact of external shocks on fiscal reaction function in a small open economy

<jats:p>Fiscal authorities in a small open economy should utilize its fiscal instrument feedback to external shocks. This paper analyzes the dynamic respond of budgetary policy to external shocks in Malaysia by a Structural VAR model. On the one hand, the results confirm that external shocks have a significant effect on fiscal reaction function variables. On the other hand, the direct consideration of budgetary reaction of Malaysia to external shocks is limited. Therefore, fiscal authorities should enhance its feedback to external shocks to achieve stable and sustain growth.</jats:p>