Characterization of the Dynamic Effects of Fiscal Shocks in a Small Open Economy
Staff Working Papers from Bank of Canada
The author studies the macroeconomic consequences of discretionary changes in the fiscal policy instruments for Canada. He adopts a semi-structural vector autoregression framework. Restrictions are based on institutional interactions between some policy and non-policy instruments that mimic a government's decision process. The author characterizes the actual economy's response to fiscal shocks, and proposes a theoretical model for a small open economy with nominal and real rigidities to test for the endogenous transmission mechanisms following shocks to government spending. He pursues a limited-information econometric strategy by comparing the theoretical impluse-response functions with the empirical ones, capturing the effects of a disturbance in government spending. Generally, the results of the model are very close to the observed reactions, especially for consumption, investment, exports, imports, and inflation; however, the model fails to predict the real exchange rate reaction.
Keywords: Economic models; Exchange rates; Fiscal policy (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Pages: 43 pages
New Economics Papers: this item is included in nep-fin, nep-ifn and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:04-41
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