Fiscal shocks and real exchange rate dynamics: Some evidence for Latin America

This paper analyses the effects of fiscal shocks using a two-country macroeconomic model for output, labour input, government spending and relative prices which provides the orthogonality restrictions for obtaining the structural shocks. Dynamic simulation techniques are then applied, in particular to shed light on the possible effects of fiscal imbalances on the real exchange rate in the case of six Latin American countries. Using quarterly data over the period 1980-2006, we find that in a majority of cases fiscal shocks are the main driving force of real exchange rate fluctuations

Impact of fiscal policy shocks on the Indian economy

Impact of Fiscal Policy Shocks on the Indian Economy Swati Yadav , V.Upadhyay , Seema Sharma Abstract In this paper, we analyse the impact of fiscal shocks on the Indian economy using structural vector autoregression (SVAR) methodology. The study uses quarterly data for the period 1997Q1 to 2009Q2. Two different identification schemes have been used to assess the effects of shocks to government spending and tax revenues on output. The recursive scheme is based on the Cholesky decomposition and the second identification scheme Blanchard & Perrotti (1999) technique of using information on tax system to identify the SVAR model. We find that the impulse responses obtained from both identification schemes behave in a similar fashion but the value of multipliers differs. Also the shock to tax variable has a bigger impact on GDP than the government spending shock. In the extended four variable VAR model the effects of fiscal shocks on private consumption has been assessed using the recursive identification scheme. Findings indicate that the tax variable has larger impact on private consumption as compared to the government spending variable. In the short run the impact of expansionary fiscal shocks follow Keynesian tradition but the long run response is mixed.SVAR, Fiscal shocks, Multipliers

Fiscal Shocks and Their Consequences

This paper investigates the response of hours worked and real wages to fiscal policy shocks in the U.S. during the post World War II era. We identify these shocks with exogenous changes in military purchases and argue that they lead to a persistent increase in government purchases and tax rates on capital and labor income, and a persistent rise in aggregate hours worked as well as declines in real wages. The shocks are also associated with short lived rises in aggregate investment and small movements in private consumption. We describe and implement a methodology for assessing whether standard neoclassical models can account for the consequences of a fiscal policy shock. Simple versions of the neoclassical model can account for the qualitative effects of a fiscal shock. Once we allow for habit formation and investment adjustment costs, the model can also account reasonably well for the quantitative effects of a fiscal shock.

Fiscal Shocks and Real Wages

I estimate the short-run dynamic effect of fiscal shocks on real wages for a panel of euro area countries. The main findings are in line with the Neo-Keynesian predictions that real wages increase in response to spending shocks. However, the scale of the wage response depends on the type of government spending

Fiscal Shocks and The Sectoral Composition of Output

We study the impact of shocks to different types of government spending on the composition of sectoral output for a panel of EMU member countries. We find that fiscal shocks lead to an increase in the relative size of the nontraded sector. There is typically no significant impact on the level of production in the tradables sector but the level of imports increases and the level of exports declines in most cases. Overall, the results show that fiscal shocks matter not only for aggregate variables but also for the sectoral composition of output.

Debt and the Effects of Fiscal Policy

A shift in taxes or in government spending (a "fiscal shock") at some point in time puts a constraint on the path of taxes and spending in the future, since the government intertemporal budget constraint will eventually have to be met. This simple fact is surprisingly overlooked in analyses of the effects of fiscal policy based on Vector AutoRegressive models. We study the effects of fiscal shocks keeping track of the debt dynamics that arises following a fiscal shock, and allowing for the possibility that taxes, spending and interest rates might respond to the level of the debt, as it evolves over time. We show that omitting a debt feedback can result in incorrect estimates of the dynamic effects of fiscal shocks. In particular, the absence of an effect of fiscal shocks on long-term interest rates -- a frequent finding in studies that omit a debt feedback -- can be explained by their mis-specification. Using data for the U.S. economy and two alternative identification assumptions we reconsider the effects of fiscal policy shocks correcting for these shortcomings.

Fiscal Shocks and Real Exchange Rate Dynamics: Some Evidence for Latin America

This paper analyses the effects of fiscal shocks using a two-country macroeconomic model for output, labour input, government spending and relative prices which provides the orthogonality restrictions for obtaining the structural shocks. Dynamic simulation techniques are then applied, in particular to shed light on the possible effects of fiscal imbalances on the real exchange rate in the case of six Latin American countries. Using quarterly data over the period 1980-2006, we find that in a majority of cases fiscal shocks are the main driving force of real exchange rate fluctuations.fiscal shocks, real exchange rate, Latin American countries

Fiscal Shocks and Fiscal Risk Management

We use the returns on a set of international financial securities to identify exogenous shocks to the Canadian federal surplus. We find that a large portion of the variation in the surplus can be replicated by a linear combination of these returns and that the rising debt observed in the 1980s and 1990s was a result of adverse exogenous shocks and a delayed response by the government to these shocks. We develop a formal framework to evaluate the potential gains from a fiscal risk management strategy, using these securities to hedge against exogenous shocks. We show that fiscal risk management can generate significant welfare gains by enhancing the sustainability of fiscal policy and thereby lowering average tax rates.Fiscal policy, sustainability, asset pricing, risk management.

Fiscal Shocks and Fiscal Risk Management

We use the returns on a set of international financial securities to identify exogenous shocks to the Canadian federal surplus. We find that a large portion of the variation in the surplus can be replicated by a linear combination of these returns and that the rising debt observed in the 1980s and 1990s was a result of adverse exogenous shocks and a delayed response by the government to these shocks. We develop a formal framework to evaluate the potential gains from a fiscal risk management strategy, using these securities to hedge against exogenous shocks. We show that fiscal risk management can generate significant welfare gains by enhancing the sustainability of fiscal policy and thereby lowering average tax rates. Nous utilisons les rendements de plusieurs actifs financiers internationaux pour identifier les chocs exogènes au surplus fédéral canadien. Nous trouvons qu'une grande proportion de la variation du surplus peut être répliquée par une combinaison linéaire de ces rendements et que la dette croissante observée durant les années 1980 et 1990 était le résultat de chocs exogènes négatifs et d'une réponse retardée du gouvernement face à ces chocs. Nous développons un cadre formel permettant d'évaluer les gains potentiels provenant d'une stratégie de gestion du risque fiscal utilisant ces actifs pour se couvrir contre des chocs exogènes. Nous montrons que la gestion du risque fiscal peut générer des gains en bien-être significatifs en améliorant la soutenabilité de la politique fiscale et ainsi en réduisant les taux d'imposition moyens.Fiscal policy, sustainability, asset pricing, risk management

Global policy at the zero lower bound in a large-scale DSGE model

The purpose of this paper is to analyse whether fiscal policies can alleviate the effects of the zero lower bound (ZLB) on interest rates and if they should be coordinated internationally. The analysis is carried out using EAGLE, a DSGE model of the global economy. We consider that the fiscal shocks are temporary and that fiscal policy retains full credibility at all times. In this setup we find significant non-linearities in a ZLB situation that amplify the effects of fiscal shocks compared to the non-ZLB case. International coordination is helpful but does not play a major role in the results. JEL Classification: E40, E62, E63, F42DSGE Models, Fiscal Moultipliers, monetary policy, zero lower bound