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


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
    • "The empirical evidences have been mixed and inconclusive. While substantial number of studies documents that fiscal policy has significant impact on macroeconomic performance (Gibson and Van Jeventer, 1997;Calitz, 2000;Abbas, Belhocine, ElGanainy & Horton, 2010;Romer and Romer, 2010;Olsan, 2011;Afonso and Sousa, 2012;Endegnanew, AmoYartey & Turn-Jones, 2012).Several other studies documents that fiscal policy does not have significant impact on macroeconomic performance (Dornbush, Fischer & Starz, 1998;Blanchard and Perotti, 1999;Blinder and Solow, 2005;Ramsey, 2008). But there are limited studies in the literature that provide strong empirical evidences from the Nigerian context that capture the, Ogun-State, Nigeria. "

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    • "reached the same result by using the same model for Turkey for the 1980-2005 period. Another study belongs to Afonso and Sousa (2009) "
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    ABSTRACT: The main objective of this paper is to analyze empirically the effects of government spending on private investment, evaluating the existence of crowding-out/-in effects, in Turkey for the 1975-2011 period. In contrast to previous studies, we employed in the paper the modified version of David A. Aschauer’s (1989) model, which allows us to see the effects of each component of government spending taking place in the Turkish budget system. The empirical findings of the paper showed that government current transfer spending, government current spending, and government interest spending crowdout private investment, whereas government capital spending crowds-in private investment in Turkey.
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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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