The Macroeconomic Effects of Fiscal Policy

European Central Bank, Directorate General Economics
Applied Economics (Impact Factor: 0.46). 02/2008; 44(34). DOI: 10.1080/00036846.2011.591732
Source: RePEc

ABSTRACT We investigate the macroeconomic effects of fiscal policy using a Bayesian Structural Vector Autoregression approach. We build on a recursive identification scheme, but we: (i) include the feedback from government debt (ii); look at the impact on the composition of output; (iii) assess the effects on asset markets (via housing and stock prices); (iv) add the exchange rate; (v) assess potential interactions between fiscal and monetary policy; (vi) use quarterly data, particularly, fiscal data; and (vii) analyze empirical evidence from the U.S., the U.K., Germany, and Italy. The results show that government spending shocks, in general, have a small effect on GDP; lead to important “crowding-out” effects; have a varied impact on housing prices and generate a quick fall in stock prices; and lead to a depreciation of the real effective exchange rate. Government revenue shocks generate a small and positive effect on both housing prices and stock prices that later mean reverts; and lead to an appreciation of the real effective exchange rate. The empirical evidence also shows that it is important to explicitly consider the government debt dynamics in the model.

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Available from: António Afonso, Sep 26, 2015
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    • "Many empirical studies (Afonso & Sousa, 2012; Romer & Romer, 2010; Abbas et al 2010; Endegnanew et al 2012; Ocran, 2011; Gibson & Van Seventer, 1997; and Calitz, 2000) (inclusive of the South Africa case) have been carried out on the link between fiscal policy actions and other aspect of the economy such as GDP, employment, inflation and current account. These studies found a significant impact of fiscal policy (tax and expenditure changes) actions on the major macroeconomic variables. "
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    ABSTRACT: This study develops comprehensive full-sector macro-econometric models for the South African economy with the aim of explaining and providing the macroeconomic effects of fiscal policy changes in the country. The models are applied to test the effectiveness of fiscal policy actions in an economic environment with existing structural supply constraints versus demand-side constraints and also to detect which components of the fiscal would be more effective in stabilising the economy. Based on the structure of the South African economy and the framework presented, the study concludes that the South African economy can be characterised as one which is embedded with structural supply constraints. Thus, a model which is suitable for policy analyses of the South African economy needs to capture the long-run supply-side characteristics of the economy. A price block is incorporated to specify the price adjustment between the supply-side sector and real aggregate demand sector. The models are estimated with time-series data from 1970 to 2011, capturing both the long-run and short-run dynamic properties of the economy. The results from the series of fiscal policy scenarios suggest that fiscal policy actions are more effective in an economic environment with limited or no supply constraints. Fiscal expansion or consolidation that comes more from government spending changes will be more effective in an economic environment where structural supply constraints are absent while tax revenue changes will be more effective in an economic environment where there exist major structural supply constraints.
    Economic Modelling 09/2013; 35:771-781. DOI:10.1016/j.econmod.2013.08.039 · 0.70 Impact Factor
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    • "Cross country comparisons within economic literature also frequently use GDP as the measure for comparison. To take two of many possible examples, Acemoglu [4] uses a multi-country examination of predicted mortality and GDP to report that increases in life expectancy did not lead to increases in income per capita, and Afonso [5] uses a Bayesian Structural Vector Autoregression approach to show that government spending shocks have a small effect on GDP, but appear to generate a quick fall in stock prices. "
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    ABSTRACT: Gross Domestic Product(GDP) is a widely used measurement of economic growth representing the market value of all final goods and services produced by a country within a given time. In this paper we question the assumption that GDP measures production, and suggest that in reality it merely captures changes in the rate of expansion of the money supply used to measure the price data it is derived from. We first review the Quantity Theory of Money $MV=PT$, and show that the Velocity of Circulation of Money(V) does not affect the price level as claimed, as it is also a factor of the quantity of transactions(T). It then follows directly that attempts to measure total production from any form of price data as the GDP measurement does, will necessarily be confounded by the inverse relationship between prices and the quantity of production, which requires that as the total quantity of production increases, prices will drop. Finally, in support of this claim we present an empirical analysis of the GDP of nine countries and one currency union, showing that when normalized for money supply growth GDP measures have been uniformly shrinking over the last 20 years, and discuss the possible reasons for this behaviour.
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    • "En esta línea, Baxter y King (1993) sostienen que un aumento de la inversión pública tiene un impacto más fuerte sobre el producto que un aumento en el consumo del gobierno. Asimismo, teoría y evidencia en cuanto a la inversión apuntan a importantes efectos desplazamiento crowding-out después de un shock fiscal: por ejemplo, Blanchard y Perotti (1999), Mountford y Uhlig (2008) y Afonso y Sousa (2009) encuentran que la inversión privada cae en respuesta a un incremento en el gasto público. En cuanto a los impuestos, Romer y Romer (2007) hallan que aumentos en los impuestos tienen un efecto fuertemente contractivo sobre la inversión y el crecimiento económico. "
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