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Macroeconomic Effects of Fiscal Policy in the Czech Republic: Evidence Based on Various Identification Approaches in a VAR Framework

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  • Michal Franta

Abstract

The paper analyzes the macroeconomic effects of fiscal policy shocks in the Czech Republic. The low number of observations available for fiscal variables significantly affects the setup of the analysis. Firstly, a small-scale VAR is considered. Secondly, the model is estimated using Bayesian techniques. Finally, all identification approaches that are currently employed by the literature and that are applicable to the Czech Republic are used. The estimation results suggest that the fiscal policy transmission mechanism in the Czech Republic exhibits some standard features (e.g., a rise in GDP and inflation after unexpected government spending, and an increase in government spending after a positive shock to government revenues). However, the uncertainty associated with the results is substantial. Furthermore, it is discussed how the identification strategy itself may represent an additional source of uncertainty of the results.

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Bibliographic Info

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2012/13.

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Date of creation: Dec 2012
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Handle: RePEc:cnb:wpaper:2012/13

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Keywords: Bayesian vector autoregression; fiscal shocks identification.;

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References

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  1. Renee Fry & Adrian Pagan, 2010. "Sign Restrictions in Structural Vector Autoregressions: A Critical Review," CAMA Working Papers 2010-22, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Jörn Tenhofen & Guntram B. Wolff & Kirsten H. Heppke-Falk, 2010. "The Macroeconomic Effects of Exogenous Fiscal Policy Shocks in Germany: A Disaggregated SVAR Analysis," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 230(3), pages 328-355, June.
  3. Mirdala, Rajmund, 2009. "Effects of Fiscal Policy Shocks in the European Transition Economies," MPRA Paper 19481, University Library of Munich, Germany.
  4. Mehrotra, Aaron & Crespo Cuaresma, Jesús & Eller, Markus, 2011. "The Economic transmission of fiscal policy shocks from Western to Eastern Europe," BOFIT Discussion Papers 12/2011, Bank of Finland, Institute for Economies in Transition.
  5. 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.
  6. Stephen Snudden & Vladimir Klyuev, 2011. "Effects of Fiscal Consolidation in the Czech Republic," IMF Working Papers 11/65, International Monetary Fund.
  7. Mountford, Andrew & Uhlig, Harald, 2002. "What are the Effects of Fiscal Policy Shocks?," CEPR Discussion Papers 3338, C.E.P.R. Discussion Papers.
  8. Gary Koop & Dimitris Korobilis, 2009. "Bayesian Multivariate Time Series Methods for Empirical Macroeconomics," Working Paper Series 47_09, The Rimini Centre for Economic Analysis, revised Jan 2009.
  9. de Castro, Francisco & Hernández de Cos, Pablo, 2008. "The economic effects of fiscal policy: The case of Spain," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 1005-1028, September.
  10. Kadiyala, K Rao & Karlsson, Sune, 1997. "Numerical Methods for Estimation and Inference in Bayesian VAR-Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 99-132, March-Apr.
  11. Giannone, Domenico & Lenza, Michele & Primiceri, Giorgio E., 2012. "Prior selection for vector autoregressions," Working Paper Series 1494, European Central Bank.
  12. Burnside, Craig & Eichenbaum, Martin & Fisher, Jonas D. M., 2004. "Fiscal shocks and their consequences," Journal of Economic Theory, Elsevier, vol. 115(1), pages 89-117, March.
  13. Vladimir Bezdek & Kamil Dybczak & Ales Krejdl, 2003. "Czech Fiscal Policy: Introductory Analysis," Working Papers 2003/07, Czech National Bank, Research Department.
  14. Fabio Canova & Evi Pappa, 2007. "Price Differentials in Monetary Unions: The Role of Fiscal Shocks," Economic Journal, Royal Economic Society, vol. 117(520), pages 713-737, 04.
  15. Caldara, Dario & Kamps, Christophe, 2008. "What are the effects of fiscal policy shocks? A VAR-based comparative analysis," Working Paper Series 0877, European Central Bank.
  16. 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.
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Cited by:
  1. Borys, Paweł & Ciżkowicz, Piotr & Rzońca, Andrzej, 2013. "Panel data evidence on effects of fiscal impulses in the EU New Member States," MPRA Paper 48243, University Library of Munich, Germany.
  2. Robert Ambrisko & Jan Babecky & Jakub Rysanek & Vilem Valenta, 2012. "Assessing the Impact of Fiscal Measures on the Czech Economy," Working Papers 2012/15, Czech National Bank, Research Department.

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