EFFECTS OF FISCAL POLICY SHOCKS ON THE ECONOMY: EVIDENCE FROM SELECTED CEE COUNTRIES

This paper presents an analysis of the effect of fiscal policy in Indonesia based on a VAR approach. Fiscal policy shocks are identified as a structural residuals related to unexpected government expenditures and tax revenues. Impulse responses are then used to simulate the dynamic response of key macroeconomics variables of shocks. The analysis shows that GDP responses negatively to tax shocks, and positively to expenditure shock. Moreover, disposable income and private consumptionreact negatively to taxation and positively to government expenditures. Altogether the results are consistent with that of Keynesian models.

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The fiscal policy and the dynamic of the economic cycle

Journal of Economic Studies ◽

10.1108/jes-08-2018-0293 ◽

2020 ◽

Vol 47 (2) ◽

pp. 231-241

Author(s):

Huthaifa Alqaralleh

Keyword(s):

Fiscal Policy ◽

Threshold Value ◽

Policy Framework ◽

Economic Cycle ◽

Content Type ◽

Unobserved Component ◽

Cyclical Fluctuations ◽

Policy Shocks ◽

The Business Cycle ◽

Unobserved Component Model

PurposeThis study seeks to determine in some detail whether the state of the economic cycle matters in considering the effects of fiscal policy shocks on output.Design/methodology/approachThis issue leads us to two primary objectives: to define the economic cycle measuring the gap with the unobserved component model with a smoother trend, which can be used efficiently to generate gap measures for use in real-time decision-making and avoids the criticisms of measures based on contentious structural models; and to look empirically at the fiscal policy stance over the phases of the cycle, bearing in mind the short time variation and smooth change between the cycle regimes.FindingsThis paper provides evidence that the fiscal policy rule seems to operate with varied coefficients depending on whether the transition variable is below or above the estimated threshold value.Originality/valueThe asymmetric response gives policymakers the impetus to reconsider the fiscal policy framework because of specific circumstances, such as shocks that can dramatically affect the nominal features of the business cycle. Put differently, stable and moderate fiscal policies would at least not contribute to cyclical fluctuations, and therefore would be better than what we have typically experienced. There would, therefore, seem to be a distinct need to address the properties of economic cycles under different fiscal policy rules.

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