Abstract
AbstractWe identify fiscal policy shocks in the EU new member states using four different methods. We use panel data techniques to estimate the output response to these shocks. We find that investment and export growth increase after fiscal consolidation and decelerate after fiscal stimulus when the shocks are expenditure‐based. In contrast, private consumption does not respond to fiscal policy shocks. Expenditure‐based fiscal consolidations reduce wages, supporting the view that fiscal consolidation of such composition enhances the competitiveness and profitability of domestic enterprises. In contrast, we do not find evidence of fiscal shocks affecting households' confidence.
Highlights
The seminal paper by Giavazzi and Pagano (1990) has renewed an argument in the economics profession regarding the effect of fiscal policy shocks on output.1 The debate has been intensified by the outbreak of the global financial crisis and subsequent fiscal crises in some advanced economies
As a robustness check, we added a real short-term interest rate as a regressor. The addition of this regressor did not change the basic results; the expansionary fiscal consolidations and contractionary fiscal stimuli were not driven by the interest rate channel. 52To be precise, we assume that the results for the AB and the underlying balance (UB) are mutually consistent in the case in which (i) both methods record fiscal actions of the same sign and the absolute value of the UB fiscal shock exceeds 0.5 per cent of GDP or (ii) no fiscal action was taken according to the AB approach and the absolute value of the UB shock is less than or equal to 0.5 per cent of GDP
For all three shock identification methods, the coefficient of art_exp is larger than zero. (The effect is weakest in the case of the Hagen decomposition (HAGEN) shock and strongest for the UB shock.) Given the potential problems with the estimation and identification of the fiscal policy shocks outlined in the previous subsections, we argue that most of the attention should be devoted to the DK and LSDVC estimates with the fiscal policy shocks identified by the UB method
Summary
The seminal paper by Giavazzi and Pagano (1990) has renewed an argument in the economics profession regarding the effect of fiscal policy shocks on output. The debate has been intensified by the outbreak of the global financial crisis and subsequent fiscal crises in some advanced economies. We estimate the effects of both types of fiscal policy shocks, whereas other studies typically focus either on fiscal consolidation (most often) or on fiscal stimulus (less frequently). Analysing both types of shocks increases the number of observations and thereby improves the accuracy of the estimates obtained. We find that investment and export growth increase after fiscal consolidation and decelerate after fiscal stimulus when expenditure-based shocks are present.
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