Economic Policy and Output Volatility in Spain, 1950-1998: Was Fiscal Policy Destabilizing?

Stefano Battilossi (), Regina Escario () and James Foreman-Peck

No E2010/5, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: Was Spanish fiscal policy destabilizing? We estimate policy reaction functions and test the impact of fiscal shocks on growth volatility over the period 1950-1998. We find that a transition from pro-cyclical to countercyclical fiscal policy occurred in the late years of the Franco regime, contributing to the stabilization of the growth pattern. The timing of the shift, between the late 1960s and early 1970s, was not determined by a single policy change, but rather by gradual pressure from economic liberalization, the external constraint imposed by a fixed exchange rate regime and the modernization of fiscal policy instruments. The aggressiveness of fiscal shocks also decreased over time, thus contributing to the progressive stabilization of output growth. There appears to be little necessity to appeal to a 'Great Moderation' of monetary policy to understand the greater stability of the Spanish economy from the 1980s

Keywords: fiscal reaction function; fiscal shocks; SVAR; growth volatility (search for similar items in EconPapers)
JEL-codes: E32 E62 N14 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2010-07
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-his and nep-mac
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