The Effects of Fiscal Policy Shocks in Romania. A SVAR Approach

Abstract

Abstract There has always been an interest in analyzing the effects of fiscal policy on the main macroeconomic variables such as GDP, inflation, interest rate, employment, but compared with the empirical literature on the effects of monetary policy on economic activity, fiscal policy has received less attention. With the recent economic recession fiscal policy was regarded with more interest since it was expected to be effective in economic recovery. An approach commonly used to estimate the effects of fiscal policy shocks on economic activity is based on vector autoregressive (VAR) models with different scheme of identification of the shocks. This paper analyzes the effects of a government expenditure shock and tax revenue shock on economic activity by applying a VAR methodology to Romanian data. For identification of fiscal policy shocks I first used a recursive approach (Cholesky decomposition) and second I apply the methodology proposed by Perotti (2002), based on Blanchard and Perotti (1999). The results obtained are consistent with other studies on emergent economies. The impact of fiscal shocks on macroeconomic variable is reduced and the fiscal multipliers are very small.