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The macroeconomic effects of fiscal policy

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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.
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Keywords: Bayesian structural VAR; C11; C32; E62; H62; debt dynamics; fiscal policy

Document Type: Research Article

Affiliations: 1: Directorate General Economics, European Central Bank, Kaiserstraße 29, Frankfurt am Main D-60311, Germany 2: Department of Economics and Economic Policies Research Unit (NIPE), University of Minho, Campus of Gualtar Braga 4710-057, Portugal

Publication date: 01 December 2012

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