The macroeconomic effects of fiscal policy in Spain

Abstract

This paper focuses on the effects of fiscal policy in Spain analysed in a VAR context. Fiscal shocks are found to involve significant effects on GDP, private consumption, private investment, interest rates and prices. Non-Keynesian effects are observed. Moreover, evidence on the channels highlighted in the literature for such effects to arise is found, notably the effects of permanent income on consumption and investment on the demand side, coupled with the response of the equilibrium wage on the supply side affecting entrepreneurial profits and investment. The response of interest rates seems to reinforce both effects. Furthermore, the different readings of spending or taxes do not affect macroeconomic variables homogeneously.

The Adverse Effect of Government Spending on Private Consumption in New Keynesian Models

“…Blanchard and Perotti (2002), Perotti (2005) as well as Bouakez and Rebei (2007) find a strong negative response of investment. Burnside et al (2004) do not find any, while Fatas and Mihov (2001), Castro (2006) as well as Galí et al (2007) find a hump-shaped positive investment response.…”

“…Different components of government spending have different effects on economic variables. Castro (2006) and Heppke‐Falk et al . (2006) find that GDP and private consumption both have a hump‐shaped response in the face of a shock to both purchases of goods and public investment, while private investment does not respond.…”

“…Blanchard and Perotti (2002) as well as Bouakez and Rebei (2007) find a positive impact response of GDP of roughly 1 for the USA. Other authors such as Burnside et al (2004) (for the USA), Castro (2006) (for Spain), Galí et al (2007) (for the USA) or Fatas and Mihov (2001) find a hump-shaped response with a maximum impact of around one, with the timing of the peak ranging between 5 and 16 quarters. Blanchard and Perotti (2002) also find a high impact of similar magnitude between 12 and 20 quarters, while the GDP response for quarters 4-8 is lower.…”

The output effects of tax changes: narrative evidence from Spain

“…Overall, our results appear smaller when compared to previous findings of the narrative literature, and they contrast sharply with the results found for Spain thus far. In this regard, the related literature typically finds that the short-term GDP response to a positive net tax shock tends to be expansionary, a fact that is rationalized in those studies by highlighting that, following the revenue shock, a parallel increase of government expenditure takes place, pushing up GDP, see de Castro (2006), de Castro and Hernández de Cos (2008), and de Castro et al (2014. In addition, this result probably reflects the difficulties with properly identifying a net tax shock within the SVAR approach and limited sample sizes, as reflected in a number of studies with European data, see European Commission (2012).…”

Stock Return Response to Monetary and Fiscal Policy Interaction in Singapore

“…In the result of this stock markets performance also become positive due to health corporate sector. Third is Ricardian stance that describe that role of fiscal policy is irrelevant and nothing is contributed by fiscal policy in stock prices (Afonso & Sousa, 2011;Barro, 1979;De Castro, 2006;Giorgioni & Holden, 2003). In a nutshell, influence of fiscal policy on stock market may be negative, positive or irrelevant (Chatiziantoniou et al, 2013).…”