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Macroeconomic responses to fiscal shocks in Portugal

Elva Bova and Violeta Klyviene

Journal of Economic Studies, 2020, vol. 47, issue 5, 1051-1069

Abstract: Purpose - This study analyses the impact of fiscal shocks on GDP, inflation and interest rates in Portugal over 1995–2017. Design/methodology/approach - Multipliers are estimated using a structural VAR (SVAR) a' la Findings - The analysis finds small tax multipliers and larger government consumption multipliers for growth, while short-term responses to shocks in transfer and investment spending are found to be negligible. Fiscal shocks have an ambiguous impact on inflation, and fiscal shocks of an expansionary nature are found to trigger declines in interest rates. The results are robust to different orderings of variables, to the selection of an alternative time period which excludes the financial crisis and to an alternative estimation technique. Research limitations/implications - A major limitation of the study relates to the relatively short time period which does not allow capturing the impact of possible structural breaks. Practical implications - This analysis is relevant for countries, like Portugal, that display high debt levels and volatile market sentiment and lack an independent monetary policy. Originality/value - Overall, the analysis of output multipliers compares well with some other studies conducted on the Portuguese economy and confirms the importance of the disposable income channel in the transmission of fiscal shocks to the rest of the economy. The study is one of the first to focus also on the implications of fiscal shocks on inflation and long-term interest rates. It is the first to apply the local projection method to estimate multipliers in Portugal.

Keywords: Fiscal shocks; Structural VAR; Portugal; E62; H3; C20 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Macroeconomic Responses to Fiscal Shocks in Portugal (2019) Downloads
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