Bayesian estimation of a new Keynesian policy model for a small open economy

A Regime-Based Effect of Fiscal Policy: Evidence from an Emerging Economy

“…The intuition behind this ordering is that (i) because it is unrelated to the business cycle, government spending does not react instantly to shocks to other economic aggregates but only with certain lags (Caldara and Kamps, 2008), (ii) output is affected contemporaneously by government spending's shocks but only with a lagged shock to tax policy, (iii) tax revenue responds instantly to all other shocks in the benchmark model. Notice that, in the augmented model, the interest rate is ordered last to capture the reaction function of the Tunisian central bank (Bouzid, 2016).…”