Fiscal Shocks and Policy Regimes in Some OECD Countries

Abstract

The objective of this paper is twofold. First, for some OECD countries we econometrically select the fiscal policy regimes, i.e. a "set of rules" for the conduct of fiscal policy. Second, we identify different types of fiscal policy shocks related to expenditure and taxation, and simulate their effects on GDP and the price level. Estimation and simulation are obtained within the structural VAR framework. We found that France and Italy are characterized by fiscal regimes that target either the government expenditure on salaries and transfers, or the residual spending. For Germany and the US instead the selected fiscal regimes exclude any (contemporaneous) influence of innovations in government wages and transfers on both taxation and residual spending, i.e. decisions on government wages and transfers do not precede other fiscal-policy decisions. Except for France, government expenditure on salaries and transfers has the strongest procyclical effect on output, but lower than expected: a one percent decrease in public spending on wages and transfers (as a ratio of GDP) lowers output at most by 0.1 percent. Innovations on taxes that decrease fiscal pressure have the standard positive effect on output, but not in the long run.