Effects Of Fiscal Shocks Research Articles

International Fiscal-Financial Spillovers:the Effect of Fiscal Shocks on Cross-Border Bank Lending

This paper sheds new light on the degree of international fiscal-financial spillovers by investigating the effect of domestic fiscal policies on cross-border bank lending. By estimating the dynamic response of U.S. cross-border bank lending towards 45 recipient countries to exogenous domestic fiscal shocks (both measured by spending and revenue) between 1990Q1 and 2012Q4, we find that expansionary domestic fiscal shocks lead to a statistically significant increase in cross-border bank lending and the size of the effect is comparable to an exogenous decline in the federal funds rate by about 25 bp (50 bp) for spending (revenue) shocks. The fiscal-financial spillovers we find are independent of changes in monetary policy or financial conditions measured by the VIX. The effects also depend on the sign of the fiscal shocks and the underlying economic conditions of a source country. While capital controls seem to play some moderating role, we do not find systematic and statistically significant differences in the spillover effects across recipient countries, depending on their exchange rate regime. The extension of the analysis to fiscal shocks for a panel of 16 small open economies largely confirms the U.S. economy’s findings.

The Impact of Fiscal Policy on Aggregate Economic Activity: A Regime Dependent Impulse Response Analysis

Asymmetries in fiscal policies cannot be captured by linear time series models. In order to examine the asymmetry responses of output in different phases of the business cycle, Markov Regime Switching (MRS) model is an alternative technique that is used to achieve the objective. The main objective of this study is to empirically explore the effects of fiscal shocks (spending and taxes) on Pakistan’s overall economic activity GDP while utilizing Markov Switching MS-VAR model. The model is characterized to allow for the variation in mean, coefficients and in error variances. The study results show that the effect of shocks and the size of multiplier varies across regimes confirming the asymmetric behavior of fiscal policy transmission mechanism. Moreover, the impact of positive spending shock has a stronger effect on output in the recession as compared to boom. One surprising result of the study is that the tax shock increases the output both in recession and boom. Lastly, spending and revenue behave a-cyclically.
 JEL Classification Codes: C11; C32; E62

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

Fiscal Multipliers in Brazil: A Sensitivity Analysis on the Structural Identification Procedure

The present study measured the effectiveness of Brazilian fiscal policy (the effects of fiscal shocks on output) through several specifications of SVAR models. The focus was on the impact of tax shocks on output, but spending shocks effects were also estimated. Two databases for fiscal variables were used: the official data from National Treasury and a set of alternative data by Gobetti and Orair [1]. The tax multiplier depends on the assumption about the sensitivity of government’s revenue to output: the greater the sensitivity, the greater is the tax multiplier. The preferred estimates of tax multipliers in this paper are higher than other estimates in the Brazilian literature. In most identifications both spending and tax (impact) multipliers are below unit.

International Fiscal-Financial Spillovers: The Effect of Fiscal Shocks on Cross-Border Bank Lending

This paper sheds new light on the degree of international fiscal-financial spillovers by investigating the effect of domestic fiscal policies on cross-border bank lending. By estimating the dynamic response of U.S. cross-border bank lending towards the 45 recipient countries to exogenous domestic fiscal shocks (both measured by spending and revenue) between 1990Q1 and 2012Q4, we find that expansionary domestic fiscal shocks lead to a statistically significant increase in cross-border bank lending. The magnitude of the effect is also economically significant: the effect of 1 percent of GDP increase (decrease) in spending (revenue) is comparable to an exogenous decline in the federal funds rate. We also find that fiscal shocks tend to have larger effects during periods of recessions than expansions in the source country, and that the adverse effect of a fiscal consolidation is larger than the positive effect of the same size of a fiscal expansion. In contrast, we do not find systematic and statistically significant differences in the spillover effects across recipient countries depending on their exchange rate regime, although capital controls seem to play some moderating role. The extension of the analysis to a panel of 16 small open economies confirms the finding from the U.S. economy.

Comparison of the stabilising effects of government spending shocks in the Czech Republic, Hungary and Poland

This study examines the effects of government spending shocks in three Central and Eastern European (CEE) countries: the Czech Republic, Hungary and Poland. The article uses structural vector autoregression (SVAR) models with an identification scheme based on that of Blanchard and Perotti (2002). The results of government spending shocks in these countries are consistent with the general view that the spending innovation increases output in the short term. The impulse response functions show that the maximum response of output to spending shocks is lagged. In order to measure the effects of fiscal shocks, the peak and cumulative multipliers are calculated. In the baseline specification, which is the same for each country, the calculated peak spending multiplier (adjusted to be interpreted in the national currency) ranges from 0.2 in the Czech Republic to more than 1 in Poland. The response of GDP to spending shock is larger than 1 cumulatively.

Testing for fundamental vector moving average representations

We propose a test for invertibility or fundamentalness of structural vector autoregressive moving average models generated by non‐Gaussian independent and identically distributed structural shocks. We prove that in these models and under some regularity conditions the Wold innovations are a martingale difference sequence (mds) if and only if the structural shocks are fundamental. This simple but powerful characterization suggests an empirical strategy to assess invertibility. We propose a test based on a generalized spectral density to check for the mds property of the Wold innovations. This approach does not require the specification and estimation of the economic agent's information flows or the identification and estimation of the structural parameters and the noninvertible roots. Moreover, the proposed test statistic uses all lags in the sample and it has a convenient asymptotic N(0,1) distribution under the null hypothesis of invertibility, and hence, it is straightforward to implement. In case of rejection, the test can be further used to check if a given set of additional variables provides sufficient informational content to restore invertibility. A Monte Carlo study is conducted to examine the finite‐sample performance of our test. Finally, the proposed test is applied to two widely cited works on the effects of fiscal shocks by Blanchard and Perotti (2002) and Ramey (2011). Fundamental representations generalized spectrum identification invertible moving average C5 C32 E62

Testing for Fundamental Vector Moving Average Representations

We propose a test for invertibility or fundamentalness of structural vector autoregressive moving average models generated by non-Gaussian independent and identically distributed (iid) structural shocks. We prove that in these models and under some regularity conditions the Wold innovations are a martingale difference sequence (mds) if and only if the structural shocks are fundamental. This simple but powerful characterization suggests an empirical strategy to assess invertibility. We propose a test based on a generalized spectral density to check for the mds property of the Wold innovations. This approach does not require to specify and estimate the economic agent's information flows or to identify and estimate the structural parameters and the non-invertible roots. Moreover, the proposed test statistic uses all lags in the sample and it has a convenient asymptotic N(0, 1) distribution under the null hypothesis of invertibility, and hence, it is straightforward to implement. In case of rejection, the test can be further used to check if a given set of additional variables provides sufficient informational content to restore invertibility. A Monte Carlo study is conducted to examine the finite-sample performance of our test. Finally, the proposed test is applied to two widely cited works on the effects of fiscal shocks by Blanchard and Perotti (2002) and Ramey (2011).

Effects of Fiscal Shocks in a Globalized World

Although theoretical models consistently predict that government spending shocks should lead to appreciation of the domestic currency, empirical studies have regularly found depreciation. Using daily data on U.S. defense spending (announced and actual payments), the paper documents that the dollar immediately and strongly appreciates after announcements about future government spending. In contrast, actual payments lead to no discernible effect on the exchange rate. It examines the responses of other variables at the daily frequency and explores how the response of the exchange rate to fiscal shocks varies over the business cycle as well as at the zero lower bound and in normal times.

The effects of fiscal shocks on the exchange rate in the EMU and differences with the USA

We analyse the impact of government spending shocks on the real effective exchange rate and net exports in the Euro Area within a standard structural VAR framework. We show that higher government spending leads to real exchange rate appreciation and to a fall in net exports, jointly with lower primary budgetary surpluses, in line with the “twin deficits” hypothesis. Our results are consistent both with the home-bias hypothesis of public expenditure and with public investment contributing to generating relative productivity gains in the traded goods sector. Contrary to what is observed in the Euro Area, the real effective exchange rate depreciates in the USA in response to higher government spending. Such different behaviour is attributed to two factors, namely the leading role of the US dollar as a “safe haven” currency and the countercyclical behaviour of discretionary government spending in the USA.

THE EFFECTS OF FISCAL SHOCKS IN A NEW KEYNESIAN MODEL WITH USEFUL GOVERNMENT SPENDING

This paper develops a medium-scale New Keynesian model where consumer preferences depend on government expenditures and public capital is productivity-enhancing in order to account for recent evidence on the effects of government spending shocks. Under plausible assumptions on the degree of complementarity between private and public expenditures and on the output elasticity of public spending and considering alternative monetary policy rules, the effects of fiscal shocks delivered by the model are in line with the evidence.

The Analysis of Fiscal Policy Shocks’ Transmission in Morocco

The objective of this paper is to analyze the impact of fiscal shocks on economic activity in Morocco. Thus, a first section focuses on a brief presentation of the theoretical debates around the question of the effectiveness of fiscal policy. Subsequently, few empirical studies whose concerns are similar to this study are demonstrated shown. Finally, the results of SVAR model concludes that a positive impact of an expansionary fiscal policy on growth and household consumption in Morocco.

Efeitos dos choques fiscais sobre o mercado de trabalho brasileiro

Esse trabalho tem por objetivo entender quais os efeitos dos choques fiscais sobre o mercado de trabalho brasileiro. Em particular, utiliza se uma abordagem SVAR para avaliar esses efeitos sobre o emprego e o salário real. Os choques fiscais são identificados a partir da imposição de restrições de sinais puras sobre a relação dinâmica entre os gastos do governo, o produto real e a oferta de trabalho. As restrições são obtidas a partir de funções de resposta a impulso Bayesianas derivadas de um modelo DSGE na tradição da Nova Síntese Neoclássica. As funções de resposta a impulso obtidas a partir da abordagem SVAR mostram que choques fiscais aumentam o salário real e o emprego.

Impact of Fiscal Policy Shocks on the Indian Economy

In this article, we analyse the impact of fiscal shocks on the Indian economy using structural vector auto-regression (SVAR) methodology. The study uses quarterly data for the period 1997Q1–2009Q2. Two different identification schemes have been used to assess the effects of shocks on government spending and tax revenues on output. The recursive scheme is based on the Cholesky decomposition and the second identification scheme of Blanchard & Perrotti’s (1999) technique of using information on the tax system to identify the SVAR model. We find that the impulse responses obtained from both identification schemes behave in a similar fashion but the values of the multipliers differ. Also, the shock-to-tax variable has a bigger impact on gross domestic product (GDP) than the government spending shock. In the extended four variable VAR model, the effects of fiscal shocks on private consumption has been assessed using the recursive identification scheme. Findings indicate that the tax variable has a larger impact on private consumption compared to the government spending variable. In the short run, the impact of expansionary fiscal shocks follows the Keynesian tradition but the long-run response is mixed. JEL Classification: C32, E32, E62

The Effects of Fiscal Shocks with Debt-Stabilizing Budgetary Policies in Italy

We study the effects of fiscal policy on macroeconomic developments in Italy over the period 1982-2010 with a Structural Vector Autoregression (SVAR) model. We include public debt and impose the government budget constraint in the estimation. In contrast with previous research we also include foreign demand, significantly improving estimation accuracy. We find that movements in debt induce stabilizing reactions in fiscal policy. In this context, expenditure and revenue shocks have significant effects on economic activity; these are stronger, as well as more precisely estimated and robust, for expenditure. Expenditure multipliers are higher when we exclude from our sample the initial years and, in particular, when we focus on the post-Maastricht period.

The Effects of Fiscal Shocks on the Exchange Rate in the EMU and Differences with the US

We analyse the impact of government spending shocks on the real effective exchange rate and net exports in the Euro Area within a standard structural VAR framework. We employ a new database that contains quarterly fiscal variables for the Euro Area as a whole. We show that higher government spending leads to real exchange rate appreciation and to a fall in net exports, jointly with lower primary budgetary surpluses, which turns out to be fully consistent with the “twin deficits” hypothesis. The different components of public spending, namely wage and non-wage consumption expenditure, overall public consumption expenditure and public investment, bring about real appreciations. Our results are therefore also consistent both with the home-bias hypothesis of public expenditure and with public investment contributing to generating relative productivity gains in the traded goods sector. Contrary to what is observed in the Euro Area, the real effective exchange rate depreciates in the US in response to higher government spending. This discrepancy can ultimately be explained by the reaction of nominal interest rate spreads and the uncovered interest parity condition. The dissimilar reaction of short-term nominal interest rate spreads is attributed to two factors, namely the role of the US dollar as a safe haven currency and the countercyclical behaviour of discretionary government spending in the US.

The Effects of Fiscal Shocks on the Exchange Rate in Spain

We analyze the impact of fiscal shocks on the Spanish effective exchange rate over the period 1981-2008 using a standard structural VAR framework. We show that government spending brings about positive output responses, jointly with real appreciation. Such real appreciation is explained by persistent nominal appreciation and higher relative prices. Our results indicate that the adoption of the common currency has not implied any significant change in the way fiscal shocks affect external competitiveness through their effect on relative prices. In turn, the current account deteriorates when government spending rises mainly due to the fall of exports caused by the real appreciation. Accordingly, our results in this regard are largely consistent not only with the conventional Mundell Fleming model and, in general a traditional Keynesian view, but also with a wide set of RBC or New Keynesian models under standard calibrations. Moreover, our estimations are fully in line with the “twin deficits” hypothesis. Furthermore, we show that shocks to purchases of goods and services and public investment lead to real appreciation, whereas the opposite happens with higher personnel expenditure. We obtain output multipliers around 0.5 on impact and slightly above unity one year after the shock, which are in line with previous empirical evidence regarding some individual European countries.

Efekty podażowe szoków fiskalnych w gospodarce polskiej na podstawie modelu realnego cyklu koniunkturalnego

Efekty podażowe szoków fiskalnych w gospodarce polskiej na podstawie modelu realnego cyklu koniunkturalnego

Fiscal Shocks and Real Rigidities

In this paper we show that results on the effects of fiscal shocks in Galí, López-Salido and Vallés (2007) rely on a high degree of price stickiness and a large percentage of financially constrained agents. Real rigidities in the form of habit persistence, fixed firm-specific capital and Kimball demand curves interact in interesting ways with nominal and financial rigidities and allow us to reproduce the same consumption multiplier as Galí et al. (2007) under only two and a half quarters of price stickiness, instead of four, and only 30 per cent of constrained agents instead of 50 per cent. Therefore, real rigidities are useful in the study of fiscal shocks in addition to monetary and productivity shocks as has been shown in the previous literature, though rule-of-thumb consumption remains too crude a mechanism for accounting for the hump-shaped response of consumption found in the data.

Investment Adjustment Costs: Evidence from UK and US Industries

This paper evaluates empirical evidence for costs which penalize changes in investment using UK and US industry data. In aggregate models, such costs have been introduced to help account for (i) the effects of monetary shocks on investment, (ii) the effects of fiscal shocks on hours, real wages, and output, and (iii) asset returns. Industry analysis, however, offers no support for investment adjustment costs in the UK and only weak support in the US. The results, therefore, suggest that it remains difficult to motivate and interpret the investment friction introduced in recent aggregate models from a disaggregated empirical perspective.