The Macroeconomic Effects of Fiscal Policy
University of Lisbon - ISEG (School of Economics and Management); UECE (Research Unit on Complexity and Economics)
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
Date posted: January 25, 2009
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