Sep 21, 2011

Articles in journals

Afonso, A., Sousa, R.

10

21

With a new quarterly dataset, we estimate a Bayesian Structural Autoregression model and a Fully Simultaneous System approach to analyze the macroeconomic effects of fiscal policy. The results show that positive government spending shocks, in general, have a negative effect on real GDP; lead to important 'crowding-out' effects of private consumption and investment; have a persistent and positive effect on the price level and mixed impact on the average financing cost of government debt. Explicitly considering the government debt dynamics in the model is also important. Finally, a VAR counter-factual exercise confirms that unexpected positive government spending shocks create relevant 'crowding-out' effects. From a policy perspective increasing government spending does not emerge as an obvious instrument to foster economic activity while fiscal imbalances have been mostly counteracted by higher fiscal revenues.

Fully Simultaneous System,B-SVAR,fiscal policy,debt dynamics,Portugal,