Assessing the macroeconomic effects of fiscal policy in Colombia

Purpose – The purpose of this paper is to study the short-term macroeconomic effects of the fiscal policy in Colombia for the 1980-2007 period using a structural vector autoregression (SVAR) model. Design/methodology/approach – The authors' benchmark is a five-variable SVAR model which includes government spending, output, tax revenues, inflation and short-term interest rates. In addition, the authors specified six-variable VAR models, adding in turn private consumption, private investment, the unemployment rate and the real minimum wage to the last set of variables. Two alternative identification techniques are used in the VARs to check the robustness of the results. Findings – The following effects of a positive government spending shock are found. First, the GDP responds positively and significantly during the first six quarters. The cumulative output multiplier fluctuates between 1.12 and 1.19. Second, both inflation and nominal interest rates respond positively and significantly. Third, the authors find a significant positive response by both private consumption and private investment. Finally, the unemployment rate reacts negatively and significantly. Research limitations/implications – The most surprising result comes from the response of output to a positive shock in taxes. Nonetheless, the positive respond of the GDP is short lived and has little significance. Practical implications – The authors' results support the smoothing role of fiscal policy on output fluctuations, which implies its capacity to restore real activity effectively in critical times like the ones currently being forecast. Originality/value – The negligible results found previously for Colombia could be related to the fiscal data used, which are not keep coherence with national accounting. To solve these obstacles, a quarterly fiscal database is assembled on an approximately accrual basis for the general government.