Estimating the Effects of Fiscal Policy in OECD Countries

Abstract

CEPS Working Documents are published to give an indication of the work within CEPS' various research programmes and to stimulate reactions from other experts in the field.Unless otherwise indicated, the views expressed are attributable only to the author in a personal capacity and not to any institution with which he is associated. Abstract This paper studies the effects of fiscal policy on GDP, prices and interest rates in 5 OECD countries, using a structural Vector Autoregression approach. Its main results can be summarized as follows: 1) The estimated effects of fiscal policy on GDP tend to be small: positive government spending multipliers larger than 1 tend to be the exception; 2) The effects of fiscal policy on GDP and its components have become substantially weaker over time; 3) Under plausible values of the price elasticity, government spending has positive effects on the price level, although usually small; 4) Government spending shocks have significant effects on the nominal and real short interest rate, but of varying signs; 5) In the post-1980 period, net tax shocks have positive short run effects on the nominal interest rate, and typically negative or zero effects on prices; 6) The US is an outlier in many dimensions; responses to fiscal shocks estimated on US data are often not representative of the average OECD country included in this sample.

The Macroeconomic Effects of Exogenous Fiscal Policy Shocks in Germany: A Disaggregated SVAR Analysis

“…As mentioned by Perotti (2005) the innovations in the fiscal variables u e t and u r t can be thought of as a linear combination of three types of shocks: i) the automatic response of government expenditure and revenue to real output, inflation, and interest rate innovations; ii) the systematic, discretionary response of fiscal policy to shocks to the macro variables; and iii) the random, discretionary fiscal policy shocks, which are the underlying structural shocks to be identified. This leads to the following formal representation of the reduced form residuals:…”

“…5 For West Germany (1975Germany ( :1 -1989, Perotti (2005) finds a significant positive cumulative response of GDP to a government spending shock at 4 quarters which reverses into negative at 12 quarters. For the same sample period, private consumption and private investment show insignificant responses at 4 quarters and a significant decline at 12 quarters.…”

“…Rather, their tax payments are based on average profit patterns in the previous year. We have therefore set this sub-elasticity to 0, which is in line with Perotti's (2005) assumption. Nevertheless, increasing the sub-elasticity of corporate tax income to the annual value of 1.69, leads to an overall elasticity of α r y = 1.25.…”

“…For Europe, the number of papers appears to be limited. As for Germany, few studies exist (e.g., Höppner (2003) and Perotti (2005)). …”

“…As for Germany, few studies exist (e.g., Höppner (2003) and Perotti (2005)). They have been restricted by relatively short time series and highly aggregated fiscal data.…”