The effects of fiscal policy shocks in Bangladesh: An agnostic identification procedure

Ataur Rahaman and Roberto Leon-Gonzalez

Economic Analysis and Policy, 2021, vol. 71, issue C, 626-644

Abstract: This paper analyzes the macroeconomic effects of fiscal shocks in Bangladesh using the sign restriction approach in a Bayesian structural vector autoregression (SVAR) framework. We identify a generic business cycle shock to deal with the endogenous movement of fiscal variables along with a monetary policy shock to absorb the variations due to those shocks. Both unanticipated and anticipated fiscal shocks, that is, government expenditure and revenue shocks, are also identified by minimal sign restrictions. In identifying those shocks, we do not impose any restrictions on the sign of the key variable of interest. We find that private investment and consumption significantly increase due to expansionary government expenditure shock. Such an increase in private consumption is consistent with neo-Keynesian prediction. The fall in output due to the tax increase shock is highly robust. Private consumption also decreases due to a tax increase, although investment does not. The results suggest that fiscal policy, especially tax policy, is more effective than monetary policy in stabilizing output. Moreover, the fiscal authority could increase government expenditure without hurting private investment.

Keywords: Fiscal policy; Monetary policy; Business cycle; Bayesian VAR; Sign restrictions; Bangladesh (search for similar items in EconPapers)
JEL-codes: C32 E62 H20 H30 H50 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0313592621000941
Full text for ScienceDirect subscribers only

Related works:
Working Paper: The Effects of Fiscal Policy Shocks in Bangladesh: An Agnostic Identification Procedure (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:71:y:2021:i:c:p:626-644

DOI: 10.1016/j.eap.2021.07.002

Access Statistics for this article

Economic Analysis and Policy is currently edited by Clevo Wilson

More articles in Economic Analysis and Policy from Elsevier
Bibliographic data for series maintained by Catherine Liu ().