Regime-Switching, Stochastic Volatility, Fiscal Policy Shocks and Macroeconomic Fluctuations in Peru

Gabriel Rodríguez and Joseph Santisteban
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Joseph Santisteban: Departamento de Economía de la Pontificia Universidad Católica del Perú

No 2024-539, Documentos de Trabajo / Working Papers from Departamento de Economía - Pontificia Universidad Católica del Perú

Abstract: Following Chan and Eisenstat (2018a), we use a family of regime-switching models with time-varying parameters and stochastic volatility (RS-VAR-SV) to analyze the evolution of fiscal shocks impacts on Peru's economic growth from 1995Q1 to 2019Q4. Key findings include: (i) identification of two distinct economic regimes with different macroeconomic fundamentals tied to improvements in fiscal and monetary policy; (ii) enhanced model fi with the inclusion of stochastic volatility; (iii) a positivetrend in the size of spending multipliers, though they remain below unity; (iv) during the 2008 Global Financial Crisis, capital expenditure shocks mitigated the decline in economic growth by 2 percentage points, highlighting their counter-cyclical potential. These findings are corroborated by robustness checks, which include changes in priors, variable reordering, adjustments in external and demand variables, andextending the sample to 2022Q4 to encompass the COVID-19 crisis. Palabras claves: Regime-Switching Models, Fiscal Multipliers, Marginal Likelihood, Cross-Entropy, Bayesian, Model Comparison, Peruvian Economy, Stochastic Volatility. JEL Classification-JE: C11, C32, C52, E62, H30.

Keywords: Regime-Switching Models; Fiscal Multipliers; Marginal Likelihood; Cross-Entropy; Bayesian; Model Comparison; Peruvian Economy; Stochastic Volatility. (search for similar items in EconPapers)
Pages: 52
Date: 2024
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