Abstract
We investigate the macroeconomic effects of fiscal policy using a Bayesian Structural Vector Autoregression (B-SVAR) approach. We identify fiscal policy shocks via a partial identification scheme, but also: (i) include the feedback from government debt; (ii) look at the impact on the composition of output; (iii) assess the effects on asset markets; (iv) use quarterly data; and (v) analyse empirical evidence from the US, the UK, Germany and Italy. The results show that government spending shocks, in general, have a small effect on Gross Domestic Product (GDP); lead to important ‘crowding-out’ effects; have a varied impact on housing prices and generate a quick fall in stock prices. Government revenue shocks generate a mixed effect on housing prices and a small and positive effect on stock prices. The empirical evidence also suggests that it is important to explicitly consider the government debt dynamics in the model.
Highlights
Compared to the large empirical literature on the effects of monetary policy on economic activity, fiscal policy has received less attention, a feature that contrasts with the public debates on its role
4.2 Results The starting point is the estimation of a Bayesian Structural VAR (B-SVAR)
This paper provides a detailed evaluation of the macroeconomic effects of fiscal policy
Summary
Compared to the large empirical literature on the effects of monetary policy on economic activity, fiscal policy has received less attention, a feature that contrasts with the public debates on its role. We review the existing evidence of the effects on the composition of output, on housing and stock prices, on long-term interest rates, on exchange rates, and on the interaction between monetary and fiscal policy. 11 Working Paper Series No 991 January 2009 savings when private savings do not increase by the same amount (i.e. in the absence of Ricardian equivalence) and there are no compensating foreign capital inflows, leading to a decrease in the supply of capital; and (ii) deficits increase the stock of government debt and, the outstanding amount of government bonds (relative to other financial assets) In this case, there is a “portfolio effect”, as a higher interest rate on government bonds would be required in order to incentive investors to hold the additional bonds. The authors show that there is a stabilizing role for fiscal policy that goes beyond the efficient provision of public goods
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