The macroeconomic effects of fiscal policy

• Published in: Applied economics Vol. 44; no. 34; pp. 4439 - 4454
• Main Authors: Afonso, António, Sousa, Ricardo M.
• Format: Journal Article
• Language: English
• Published: London Routledge 01.12.2012; Taylor and Francis Journals; Taylor & Francis Ltd; Taylor & Francis (Routledge)
• Series: Applied Economics
• Subjects: Bayesian analysis; Bayesian structural VAR; Crowding; debt dynamics; Economic impact analysis; Economic models; Fiscal policy; GDP; Germany; Government spending; Gross Domestic Product; Housing costs; Housing prices; Italy; Macroeconomics; Market analysis; Output rate; Prices; Public debt; Public expenditure; Quantitative Finance; Stock prices; Studies; U.S.A; United Kingdom; Italy; United Kingdom > UK; United States > US; Germany; Social Sciences & Humanities
• ISSN: 0003-6846; 1466-4283
• DOI: 10.1080/00036846.2011.591732

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.