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The effetcs of fiscal policy in Italy: Evidence from a VAR model

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Author Info

  • Raffaela Giordano

    ()
    (Bank of Italy, Economic Research and International Relations)

  • Sandro Momigliano

    ()
    (Bank of Italy, Economic Research and International Relations)

  • Stefano Neri

    ()
    (Bank of Italy, Economic Research and International Relations)

  • Roberto Perotti

    ()
    (IGIER- Bocconi University)

Abstract

This paper studies the effects of fiscal policy on private GDP, inflation and the long-term interest rate in Italy using a structural vector autoregression model. To this end, a database of quarterly cash data for selected fiscal variables for the period 1982:1-2004:4 is constructed, largely relying on the information contained in the Italian Treasury Quarterly Reports. The main results of the study can be summarized as follows. A shock to government purchases of goods and services has a sizeable and robust effect on economic activity: an exogenous one per cent (in terms of private GDP) shock increases private real GDP by 0.6 per cent after 3 quarters. The response goes to zero after two years, reflecting with a lag the low persistence of the shock. The effects on employment, private consumption and investment are also positive. The response of inflation is positive but small and short-lived. In contrast, public wages, which in many studies are lumped together with purchases, have no significant effect on output, while the effects on employment turn negative after two quarters. Shocks to net revenue have negligible effects on all the variables.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 656.

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Date of creation: Jan 2008
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Handle: RePEc:bdi:wptemi:td_656_08

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Keywords: Fiscal policy; Government spending; Fiscal multipliers; VAR;

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  1. James H. Stock & Mark W. Watson, 2001. "Vector Autoregressions," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 101-115, Fall.
  2. Wolff, Guntram B. & Tenhofen, Jörn & Heppke-Falk, Kirsten H., 2006. "The macroeconomic effects of exogenous fiscal policy shocks in Germany: a disaggregated SVAR analysis," Discussion Paper Series 1: Economic Studies 2006,41, Deutsche Bundesbank, Research Centre.
  3. Valerie A. Ramey & Matthew D. Shapiro, 1999. "Costly Capital Reallocation and the Effects of Government Spending," NBER Working Papers 6283, National Bureau of Economic Research, Inc.
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  7. 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.
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  11. Wendy Edelberg & Martin Eichenbaum & Jonas D.M. Fisher, 1998. "Understanding the effects of a shock to government purchases," Working Paper Series WP-98-7, Federal Reserve Bank of Chicago.
  12. Selma Mahfouz & Richard Hemming & Michael Kell, 2002. "The Effectiveness of Fiscal Policy in Stimulating Economic Activity--A Review of the Literature," IMF Working Papers 02/208, International Monetary Fund.
  13. 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.
  14. Roberto Perotti, 2002. "Estimating the effects of fiscal policy in OECD countries," Economics Working Papers 015, European Network of Economic Policy Research Institutes.
  15. Yann Algan & Pierre Cahuc & André Zylberberg, 2002. "Public employment and labor market performances," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00256207, HAL.
  16. 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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