Effects Of Fiscal Policy Shocks Research Articles

Macroeconomic impacts of monetary and fiscal policy in the euro area in times of shifting policies: A SVAR approach

This paper analyses the impacts of monetary and fiscal policy of the euro area on output and inflation between 2005 and 2022 using a structural vector autoregressive (SVAR) approach. We employ three alternative indicators of monetary policy, alongside government spending and revenue as fiscal variables to estimate the effects across different subperiods. The findings reveal that monetary policy tightening produces a negative and delayed effect on both output and inflation, with the effects differing across alternative monetary policy indicators in terms of duration and magnitude. A fiscal revenue shock is found to be inflationary, whereas a fiscal spending shock initially has a negative effect on growth that later turns positive, but is short-lived. The effects of fiscal policy shocks are more substantial than the effects of monetary policy shocks. The results also suggest that the effects may differ across subperiods, depending on the nature and intensity of the policy shifts.

Local projections in unstable environments

This paper develops a local projection estimator for estimating impulse responses in the presence of time variation. Importantly, we allow local instabilities in both slope coefficients and variances. Monte Carlo simulations illustrate that the method performs well in practice. Using our proposed estimator, we shed new light on the effects of fiscal policy shocks and the size of government spending multipliers. Our analysis uncovers the existence of instabilities that were unaccounted for in previous studies, and links time variation in the multipliers to the size of government debt.

Accounting for the Effects of Fiscal Policy Shocks on Exchange Rates through Markup Dynamics

Accounting for the Effects of Fiscal Policy Shocks on Exchange Rates through Markup Dynamics

Macroeconomic effects of fiscal policy shocks: panel VAR evidence from MENA countries

ABSTRACT This study examines discretionary fiscal policy effects on output by employing a Panel VAR model in MENA countries during 1990–2018. the results demonstrate fiscal multipliers are larger when public debt is low, at a high institutional quality, and during recession periods. Contrary to empirical studies, we found the response of output to fiscal shocks is larger at a low level of financial development. Our findings have significant policy implications focusing on fiscal policy mix in downturns of an economy, lower levels of public debt, lower levels of financial development, and a higher level of institutional quality.

The composition of public spending and the inflationary effects of fiscal policy shocks

The paper uses structural proxy-vector autoregressions to separately identify shocks to US government investment and government consumption expenditures. Positive public investment shocks robustly raise inflation and have a weak and insignificant impact on labor productivity. In contrast, positive public consumption shocks induce a significant fall in inflation together with a strong and persistent increase in hourly productivity. The empirical findings are consistent with a model where demand shocks have an endogenous effect on productivity due to variable technology utilization. Increases in government investment, despite adding to a productive public capital stock, induce a relatively low endogenous increase in productivity and goods supply in the short run and thus are inflationary, whereas government consumption shocks can lead to a temporary productivity increase and inflation decrease if technology utilization is relatively inexpensive to vary.

The Effects of Fiscal Policy Shocks on Aggregate Demand and Economic Growth in Kenya: A VAR Analysis

The Effects of Fiscal Policy Shocks on Aggregate Demand and Economic Growth in Kenya: A VAR Analysis

Analysis of the effects of fiscal policy shocks in the Baltic region

The study aims to compare the effects of fiscal policy shocks in three Baltic countries – Estonia, Latvia, and Lithuania - within SVAR framework, using the identification scheme proposed by Blanchard and Perotti (2002). The time sample covers quarterly data over the period of 2002q1-2019q4. The main idea of the study is to identify the effects of fiscal policy shocks in three euro area member states under a single monetary policy of the European Central Bank, but with country-specific fiscal policy shaped by the European fiscal framework. The results show that, generally, in the short term (up to four quarters), output reacts consistently with the Keynesian view, emphasizing the importance of using discretionary fiscal policy tools in stimulating economic activity in the Baltic region. However, in Estonia and Latvia, the calculated impact multipliers for net taxes are larger than spending multipliers. Although each country reacts differently to its country-specific fiscal shock, the response to the euro area money market interest rate innovation is quite similar with respect to the direction of the effect, which may indicate the robustness of the Baltic region in terms of the euro area shocks. Thus, the results emphasize the importance of conducting domestic fiscal policy adapted to the conditions of each of the analysed economies. Based on the assumptions and the methodology used in this study, the obtained findings show the limited effects of spending on Baltic economies in comparison with the effects caused by the shocks in net taxes. Moreover, due to the lack of large-scale analysis regarding the effectiveness of fiscal policy in Baltic states, the obtained results are a valuable contribution to the debate about the ‘appropriate’ size of the fiscal multipliers for the Baltic region.

From He-Cession to She-Stimulus? The labor market impact of fiscal policy across gender

Men, especially those that are young and less educated, typically bear the brunt of recessions because of the stronger cyclicality of their employment and wages relative to women’s. We study the extent to which fiscal policy may offset or worsen these asymmetric effects across gender. Using micro-level data for the U.S. from the Current Population Survey, we find that the effects of fiscal policy shocks on labor market outcomes depend on the type of public expenditure. Women benefit most from increases in the government wage bill, while men are the main beneficiaries of higher investment spending. Our analysis further reveals that the fiscal component most efficient at closing gender gaps is least suitable for offsetting inequitable business cycle effects across other socioeconomic dimensions.

The effects of fiscal policy shocks in Bangladesh: An agnostic identification procedure

This paper analyzes the macroeconomic effects of fiscal shocks in Bangladesh using the sign restriction approach in a Bayesian structural vector autoregression (SVAR) framework. We identify a generic business cycle shock to deal with the endogenous movement of fiscal variables along with a monetary policy shock to absorb the variations due to those shocks. Both unanticipated and anticipated fiscal shocks, that is, government expenditure and revenue shocks, are also identified by minimal sign restrictions. In identifying those shocks, we do not impose any restrictions on the sign of the key variable of interest. We find that private investment and consumption significantly increase due to expansionary government expenditure shock. Such an increase in private consumption is consistent with neo-Keynesian prediction. The fall in output due to the tax increase shock is highly robust. Private consumption also decreases due to a tax increase, although investment does not. The results suggest that fiscal policy, especially tax policy, is more effective than monetary policy in stabilizing output. Moreover, the fiscal authority could increase government expenditure without hurting private investment.

The effects of fiscal policy shocks on macroeconomic variables in developing countries : a meta-analysis of the DSGE literature

No AccessThe effects of fiscal policy shocks on macroeconomic variables in developing countries : a meta-analysis of the DSGE literature Adem Feto M.K. Jayamohan Arnis Vilks Adem Feto0 Search for more papers by this author M.K. Jayamohan0 Search for more papers by this author Arnis Vilks1 Search for more papers by this author Affiliations 0Bahir Dar University, Ethiopia 1Graduate School of Management, Germany Published Online:1 Mar 2021https://hdl.handle.net/10520/ejc-aa_ajber_v16_n1_a1SectionsPDF ToolsAdd to favouritesDownload CitationsTrack Citations ShareShare onFacebookTwitterLinked InRedditGMailHotmailYammer AboutAbstractStabilization of the economy through fiscal policies has been a broadly discussed subject over many decades. It gained momentum again after the 2008 global recession and is of utmost interest with regard to the COVID-19 crisis. The purpose of this paper is to examine the effects of fiscal policy on output and inflation. The data used to conduct the meta-analysis consist of empirical and calibrated fiscal impulse values of Dynamic Stochastic General Equilibrium studies and databases. An increase in fiscal policy shock by one percent leads to a one-period rise in output and inflation by 0.104 and 0.03 percent. Studies that employ the Bayesian method deliver higher effect. The interaction of fiscal impulse and interest jointly affect the output. Fiscal policy intervention in investment has more effect on growth than inflation-friendly government consumption. This study would help policy makers design stabilization strategies, and researchers to further investigate the subject matter and reconcile the contradictory conclusions of previous studies. Next article FiguresReferencesRelatedDetails None Volume 16, Issue 1 | Mar 2021 AffiliationAdonis & Abbey PublishersThe International Bibliography of Social Sciences (IBSS)EnglishBusiness and FinanceInternational JournalsAccreditationThe International Bibliography of Social Sciences (IBSS)LanguagesEnglish InformationCopyright © 2021, Adonis & Abbey Publishers:All rights reservedKeywordsDSGE modelDeveloping countriesFIVMeta-analysisFiscal policy Disclosure The authors confirm that the manuscript has been read and approved by all named authors and that there are no other persons who satisfied the criteria for authorship but are not listed. The authors confirm that they have given due consideration to the protection of intellectual property associated with this work and that there are no impediments to publication, including the timing of publication, with respect to intellectual property. Ethical conduct of research The authors state that they have obtained appropriate institutional review board outlined in the Declaration of Helsinki for all human or animal experimental investigations. A signed informed consent document has been obtained from all participants included in the study.

The Macroeconomic Effects of Fiscal Policy Shock in Ethiopia: Evidence from a Bayesian VAR Approach

This paper investigated the macroeconomic effects of fiscal policy shocks in Ethiopia using a Bayesian Vector Auto Regression model. We examined the dynamic responses of output, inflation, interest rate and exchange rate to fiscal policy shocks employing quarterly data from 2000/01Q1 to 2015/16Q4. The empirical evidence suggests that government spending shock had a positive impact on output and inflation but the effect was too small. Initially the interest rate responded negatively to government spending shocks and was positive with small effect and the nominal exchange rate showed deterioration. In addition, government revenue shocks had positive effect on real GDP and exchange rate and then they responded negatively. The inflation response to the net tax was medium and negative whereas its effect on interest rate was positive, and persistent. Furthermore, positive shocks to recurrent expenditure had a persistent positive impact on real output. Recurrent expenditure appeared not to be responsible for inflationary pressure. Interest rate picked up slightly as a result of recurrent spending shocks in the short run. The response of exchange rate to recurrent expenditure was small and remained negative. In contrast, capital expenditure was found to have an insignificant effect on output. The reasons could be the administrative lag and contractual bottleneck that are sometimes involved in executing capital projects and that appeared to be responsible for inflationary pressure. In the short term, the interest rate responded negatively and the estimated impact on exchange rate was insignificant. Following indirect tax revenue shocks the rise in output and inflation was very persistent. Regarding the effects of indirect taxes on interest rate and exchange rate our results show a clear and negative impact- whereas direct taxes were found to affect output and inflation very little and were insignificant. Initially, interest and exchange rates responded positively to direct tax shock later interest rate and exchange rate become insignificant and negative respectively. The results support the idea of a ‘crowding-in’ effect and when we take into account the feedback from government debt, the results suggest that the effects of fiscal shocks on the majority of macro variables is too small except for the real GDP for government revenue shock. Therefore, empirical evidence shows that it is important to consider government debt dynamics in the model

Regional Specific Idiosyncrasies and Fiscal Policy: Evidence from 47 Regions of the Central and Eastern European Countries

Purpose: The purpose of our article is to explore and study how shocks of fiscal policy are transmitted across Central and Eastern European (CEE) regions. Design/Methodology/Approach: We employ Bayesian panel VAR model to estimate and study the dynamic effects of fiscal policy on regional economic activity. Our sample of study includes 47 regions focusing on the CEE countries over the period 2001-2016. Findings: Having incorporated a possible structural break following the aftermath of the 2007 Crisis, the impulse response functions derived from the estimated models reveal cross-region variations in policy responses in terms of their magnitude and timing. Given the fact that the asymmetric effects of fiscal policy shocks across regions exist, we proceed in examining the sources of regional heterogeneities. We show that liquidity constraints, access to banking sector and participant rate in tertiary education have significant impact on regional fiscal multipliers. Practical Implications: The results have practical implication for macroeconomic policy - they show regional heterogeneities of fiscal policy effectiveness. Originality/value: The main value added of our paper is explaining heterogeneity of fiscal policy effects within the theoretical background of Ricardian and non-Ricardian households. Firstly, we are the first to show that regional fiscal multipliers depend on households’ access to banking sector. Secondly, the novelty of our paper is that we show that participant rate in tertiary education significantly decreases regional fiscal multipliers.

Spillover effects of fiscal policy in a monetary union: Why do fiscal instruments matter?

AbstractUsing a two‐country DSGE model, we analyse the spillover effects of fiscal policy in a monetary union. Based on a non‐Walrasian labour market with a labour force participation decision and involuntary unemployment and a detailed fiscal sector, we focus on the relative cross‐border effects of different kinds of fiscal shocks (government expenditure and tax shocks). Among the major lessons from this analysis, five general and striking results are worth highlighting : (1) spillover effects differ widely according to the fiscal instrument, (2) all fiscal instruments produce positive spillover effects on foreign GDP except a rise in government consumption, (3) the response of unemployment is not always negatively correlated with the response of output (4) the different fiscal shocks trigger different effects on foreign inflation and the term of trade, which implies heterogeneous interest‐rate and trade channels, and (5) a more accommodative monetary policy and a scenario of ‘fiscal dominance’ alter greatly the effects of fiscal policy shocks.

Measuring fiscal spillovers in EMU and beyond: A Global VAR approach

AbstractThis paper identifies and measures fiscal spillovers in the EU countries empirically using a global vector autoregression (GVAR) model. Our aim was to look at the sign and the absolute values of fiscal spillovers in a countrywise perspective and at the time profile (impulse response) of the impacts of fiscal shocks. We find moderate spillover effects of fiscal policy shocks originating in Germany and France. However, there is significant variation regarding the magnitude of the spillovers on individual destination countries and country clusters. Furthermore, we find some evidence that German or French fiscal spillovers are stronger on EMU than on non‐EMU countries.

A Closer Look at the Employment Effects of Fiscal Policy Shocks: What have Minorities Got to Do with It?

We investigate the employment effects of fiscal policy innovations using the narrative approach for different racial/ethnic groups, and separately for recessions and expansions. Our results show that (i) overall, tax shocks have larger effects, in terms of magnitude and significance, on the unemployment rate compared to defense spending shocks, (ii.) fiscal policy shocks have varying employment effects depending on gender, racial/ethnic subgroup and the stage of the business cycle, and (iii) sector, industry and occupational segregation in labor markets by gender, race and ethnicity can explain most of the variation in responses to fiscal policy shocks.

Measuring the Dynamic Effects of Fiscal Policy Shocks in Pakistan

Measuring the Dynamic Effects of Fiscal Policy Shocks in Pakistan

EMPIRICAL STUDIES ANALYZING THE DYNAMIC EFFECTS OF CHANGES IN PUBLIC EXPENDITURE AND TAXATION ON ACTIVITY

This paper analyzes the empirical literature that examines the effects of fiscal policy shocks on economic activity. Discussion related to fiscal policy is related to the impacts on economic growth is quite current, because the development of appropriate fiscal instruments can lead to steady and sustainable economic growth in the countries. The role of fiscal policy and the impact on economic activity are among the most controversial issues among academics and policymakers. In the absence of any "active" intervention in government expenses, tax revenues move automatically with the economic cycle. I can also say that government transfers can be considered as help for the unemployed, they grow as the economy slows down and unemployment rises, while labor tax returns, capital and consumption flows are declining. Resistive actions occur when the business cycle improves. In recent years, empirical studies have shown that private consumption and GDP have increased significantly, while government expenses have been severely reduced. Most empirical evidence suggests that fiscal expansion increases production and consumption and worsens the trade balance.The Kenzie and Neoclassical schools have different views on the impact of public spending on economic activity. This study has completed a detailed review of many important, relevant scientific havepapersthat empirically document these impacts. As a conclusion, we can state that although the fiscal policy theory is well developed, until recently has not received much attention from the (applied) economic practice. The first category is aimed at assessing macroeconomic impact from major reductions in the budget deficit, and the second study, in general, analyzes the stabilizing capabilities of fiscal policy variables. According to Blanchard and Perotti, the dynamic effects of the discretionary fiscal policy of macroeconomic variables have recently focused on the omissions of autoregressive vectors (2002). Some empirical studies have found a link between budget deficits, money growth and inflation, both in industrialized economies as well as in growing economies. For industrial economies most of these studies have come to the conclusion that there is little evidence that government debt affects the growth of money and inflation. In developing countries, it is often argued that high inflation is realized when governments face large and ongoing deficits financed by money emission. A change in taxes or public expenses (the so-called “fiscal shocks”) at any time prevents their development.

The Effects of Fiscal Policy Shocks in Morocco: An SVAR Approach

Interest in assessing the effects of fiscal policy shocks on macroeconomic variables, especially on GDP, has surged in recent years, since it was expected to reestablish the economic balance after the recent recession. The majority of empirical studies estimate the impact of fiscal policy on economic activity using vector autoregressive (VAR) models. This paper analyzes the effect of fiscal shocks on economic activity by applying the structural VAR methodology proposed by Blanchard and Perotty (2002) to Moroccan data. The empirical findings are consistent with other studies related to emerging economies. This assessment reveals a positive impact of expansionary fiscal policy on economic activity. However, the fiscal multipliers are found to be very small, meaning that the economic activity is not significantly influenced by fiscal policy shocks.

Effects of fiscal policy Shocks in CE3 countries (TVAR Approach)

The real output deterioration, high fiscal deficits and increased sovereign debt burden represents key phenomena that affected the maneuverability of fiscal authorities in the early crisis years. Controversy between fiscal sustainability and fiscally driven economic recovery fueled a large number of academic and policy discussions about the appropriate response of governments to the crisis challenges. Empirical literature provides mixed evidence about the effects of fiscal policy adjustments on the macroeconomic performance. Moreover, pro-cyclical patterns in fiscal policies of many countries during the pre-crisis period did not reveal clear lessons learned that would be beneficial for fiscal authorities during the crisis years. In the paper we examine effects of the fiscal policy shocks in CE3 (the Slovak Republic, the Czech Republic and Hungary) within different stages of the business cycle by employing threshold vector autoregression (TVAR) model. We calculate fiscal multipliers and generalized impulse-response functions to assess the responsiveness of the real output to the fiscal policy adjustments. The main objective is to determine whether effects of the fiscal policy shocks differ during expansion and recession. Our results indicate that the size of fiscal multipliers and responsiveness of the real output are generally higher for spending fiscal shocks while effects of revenue fiscal shocks are much less dynamic in all three countries. Moreover, results differs between upper (expansion) and lower (recession) regime as well as for the per-crisis and crisis periods.

Inference for Impulse Responses Under Model Uncertainty

In many macroeconomic applications, impulse responses and their (bootstrap) confidence intervals are constructed by estimating a VAR model in levels - thus ignoring uncertainty regarding the true (unknown) cointegration rank. While it is well known that using a wrong cointegration rank leads to invalid (bootstrap) inference, we demonstrate that even if the rank is consistently estimated, ignoring uncertainty regarding the true rank can make inference highly unreliable for sample sizes encountered in macroeconomic applications. We investigate the effects of rank uncertainty in a simulation study, comparing several methods designed for handling model uncertainty. We propose a new method - Weighted Inference by Model Plausibility (WIMP) - that takes rank uncertainty into account in a fully data-driven way and outperforms all other methods considered in the simulation study. The WIMP method is shown to deliver intervals that are robust to rank uncertainty, yet allow for meaningful inference, approaching fixed rank intervals when evidence for a particular rank is strong. We study the potential ramifications of rank uncertainty on applied macroeconomic analysis by re-assessing the effects of fiscal policy shocks based on a variety of identification schemes that have been considered in the literature. We demonstrate how sensitive the results are to the treatment of the cointegration rank, and show how formally accounting for rank uncertainty can affect the conclusions.