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Macroeconomic Responses to Fiscal Shocks in Portugal

Author

Listed:
  • Elva Bova
  • Violeta Klyviene
Abstract
This study analyses the impact of fiscal shocks on GDP, inflation and interest rates in Portugal over 1995-2017. In line with the relevant literature, we estimate multipliers using a structural VAR a' la Blanchard and Perotti (2002) based on OECD elasticities. As fiscal shocks, we include changes in direct and indirect taxes on the revenue side, and, on the expenditure side, changes in public consumption, investment and transfers. We find 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. We find an ambiguous impact of fiscal shocks on inflation, with both indirect and direct taxes having an inflationary impact but government consumption having the contrary impact. Fiscal shocks of an expansionary nature are found to trigger declines in real interest rates, possibly through the inflation channel. The results are robust to different orderings of the variables used in the structural VAR and to the selection of alternative time periods. 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.

Suggested Citation

  • Elva Bova & Violeta Klyviene, 2019. "Macroeconomic Responses to Fiscal Shocks in Portugal," European Economy - Discussion Papers 096, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    • Handle: RePEc:euf:dispap:096
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    Cited by:

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General

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