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The effects of fiscal policy on economic activity in Finland

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  • Kuismanen, Mika
  • Kämppi, Ville
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    Abstract

    This study analyzes whether fiscal policy decisions have real effects on the economy of Finland, and if they do, what are the strength and durations of the effects. We utilise the Vector Stochastic Process with Dummy Variables (VSPD) method in our empirical work. This approach is a suitable tool to study event-based episodes. Fiscal policy shocks do have an effect on the economic activity of Finland when the time period 1990-2007 is investigated. A positive tax shock (or a policy that increases public sector revenues) seems to have a positive effect on Investment and GDP but the response of private consumption is mixed. Results clearly indicate that increase in Government spending crowds out private sector activity, and the effect takes place sooner than with the Revenue variable in question. This is a clear evidence for the crowding out effect.

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    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 27 (2010)
    Issue (Month): 5 (September)
    Pages: 1315-1323

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    Handle: RePEc:eee:ecmode:v:27:y:2010:i:5:p:1315-1323

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    Web page: http://www.elsevier.com/locate/inca/30411

    Related research

    Keywords: Time series Fiscal policy Economic activity;

    References

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    1. Mountford, A.W. & Uhlig, H.F.H.V.S., 2002. "What are the Effects of Fiscal Policy Shocks?," Discussion Paper 2002-31, Tilburg University, Center for Economic Research.
    2. Raffaela Giordano & Sandro Momigliano & Stefano Neri & Roberto Perotti, 2008. "The effetcs of fiscal policy in Italy: Evidence from a VAR model," Temi di discussione (Economic working papers) 656, Bank of Italy, Economic Research and International Relations Area.
    3. Fatás, Antonio & Mihov, Ilian, 2001. "The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence," CEPR Discussion Papers 2760, C.E.P.R. Discussion Papers.
    4. Ramey, Valerie A. & Shapiro, Matthew D., 1998. "Costly capital reallocation and the effects of government spending," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 145-194, June.
    5. Craig Burnside & Martin Eichenbaum & Jonas Fisher, 2003. "Fiscal Shocks and Their Consequences," NBER Working Papers 9772, National Bureau of Economic Research, Inc.
    6. Alberto Alesina & Silvia Ardagna, 2010. "Large Changes in Fiscal Policy: Taxes versus Spending," NBER Chapters, in: Tax Policy and the Economy, Volume 24, pages 35-68 National Bureau of Economic Research, Inc.
    7. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
    8. Ellen R. McGrattan & Lee E. Ohanian, 1999. "The macroeconomic effects of big fiscal shocks: the case of World War II," Working Papers 599, Federal Reserve Bank of Minneapolis.
    9. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
    10. Dario Caldara & Christophe Kamps, 2008. "What are the effects of fiscal shocks? A VAR-based comparative analysis," Working Paper Series 877, European Central Bank.
    11. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
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    Cited by:
    1. Mihai Ioan Mutascu & Dan Constantin Danuletiu, 2011. "Taxes And Economic Growth In Romania. A Var Approach," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(13), pages 10.

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