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The Macroeconomic Effects of Fiscal Policy

Antonio Afonso

Technical University of Lisbon - ISEG (School of Economics and Management); UECE (Research Unit on Complexity and Economics); European Central Bank (ECB)

Ricardo M. Sousa

University of Minho; Economic Policies Research Unit (NIPE); London School of Economics & Political Science (LSE) - Financial Markets Group; London School of Economics

December 14, 2008

ECB Working Paper No. 991

We investigate the macroeconomic effects of fiscal policy using a Bayesian Structural Vector Autoregression approach. We build on a recursive identification scheme, but we: (i) include the feedback from government debt (ii); look at the impact on the composition of output; (iii) assess the effects on asset markets (via housing and stock prices); (iv) add the exchange rate; (v) assess potential interactions between fiscal and monetary policy; (vi) use quarterly data, particularly, fiscal data; and (vii) analyze empirical evidence from the U.S., the U.K., Germany, and Italy. The results show that government spending shocks, in general, have a small effect on GDP; lead to important "crowding-out" effects; have a varied impact on housing prices and generate a quick fall in stock prices; and lead to a depreciation of the real effective exchange rate. Government revenue shocks generate a small and positive effect on both housing prices and stock prices that later mean reverts; and lead to an appreciation of the real effective exchange rate. The empirical evidence also shows that it is important to explicitly consider the government debt dynamics in the model.

Number of Pages in PDF File: 55

Keywords: fiscal policy, Bayesian Structural VAR, debt dynamics

JEL Classification: C11, C32, E62, H62

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Date posted: January 25, 2009  

Suggested Citation

Afonso, Antonio and Sousa, Ricardo M., The Macroeconomic Effects of Fiscal Policy (December 14, 2008). ECB Working Paper No. 991. Available at SSRN: http://ssrn.com/abstract=1332385

Contact Information

Antonio Afonso
Technical University of Lisbon - ISEG (School of Economics and Management) ( email )
R. Miguel Lupi, 20
Lisbon, 1248-078
+351 21 392 2807 (Phone)
+351 21 396 6407 (Fax)
HOME PAGE: http://www.iseg.utl.pt/~aafonso/AAWeb.html
UECE (Research Unit on Complexity and Economics)
Rua Miguel Lupi 20
Lisbon, 1249-078
+351-213 925 912 (Phone)
+351-213 971 196 (Fax)
HOME PAGE: http://www.iseg.utl.pt/~uece/
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Frankfurt am Main, D-60311
HOME PAGE: http://www.ecb.int/home/html/index.en.html
Ricardo Magalhaes Sousa (Contact Author)
University of Minho ( email )
4710-057 Braga
+351253604584 (Phone)
+351253676375 (Fax)
HOME PAGE: http://www.eeg.uminho.pt/economia/rjsousa
Economic Policies Research Unit (NIPE) ( email )
Campus de Gualtar
Braga, 4710-057
+351253604584 (Phone)
+351253676375 (Fax)
HOME PAGE: http://www.eeg.uminho.pt/economia/rjsousa
London School of Economics & Political Science (LSE) - Financial Markets Group ( email )
Houghton Street
London WC2A 2AE
United Kingdom
London School of Economics ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
HOME PAGE: http://econ.lse.ac.uk
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