THE MACROECONOMIC EFFECTS OF FISCAL POLICY. A BVAR APPROACH
THE MACROECONOMIC EFFECTS OF FISCAL POLICY. A BVAR APPROACH

Summary/Abstract: The interest on fiscal policy has been recently renewed due to the economic recession and given the limited scope of monetary policy to provide additional stimulus for the economy. Also the empirical studies on fiscal policy have not reached a consensus about the effects of fiscal shocks on macroeconomic variables. This study seeks to analyze the effects of government expenditure and tax revenue shocks on economic activity by applying a BVAR methodology. The advantage of the Bayesian technique is that it allows prior information to be imposed on the system, in addition to that provided by data. This paper provides a detailed evaluation of the effects of fiscal policy in Romania, but also for the Eastern European Emerging Markets. Quarterly data for five variables are used in the estimation: GDP, inflation, interest rate, government expenditure and tax revenues. The main results show that the fiscal policy has a small effect on the considered variable.

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