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Assessing the macroeconomic effects of fiscal policy in Colombia

  • Ignacio Lozano
  • Karen Rodríguez

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.

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Article provided by Emerald Group Publishing in its journal Journal of Financial Economic Policy.

Volume (Year): 3 (2011)
Issue (Month): 3 (August)
Pages: 206-228

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Handle: RePEc:eme:jfeppp:v:3:y:2011:i:3:p:206-228
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  1. Roberto Perotti, 2007. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Working Papers 13143, National Bureau of Economic Research, Inc.
  2. Pappa, Evi, 2005. "New-Keynesian or RBC Transmission? The Effects of Fiscal Shocks in Labour Markets," CEPR Discussion Papers 5313, C.E.P.R. Discussion Papers.
  3. Rodrigo Cerda & Hermann Gonzalez & Luis Felipe Lagos, 2006. "Is fiscal policy effective? Evidence for an emerging economy: Chile 1833-2000," Applied Economics Letters, Taylor & Francis Journals, vol. 13(9), pages 575-580.
  4. 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.
  5. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
  6. Afonso, António & Ebert, Werner & Schuknecht, Ludger & Thöne, Michael, 2005. "Quality of public finances and growth," Working Paper Series 0438, European Central Bank.
  7. Enrique G. Mendoza & Assaf Razin & Linda L. Tesar, 1994. "Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption," NBER Working Papers 4864, National Bureau of Economic Research, Inc.
  8. Jorge E. Restrepo & Hernán Rincón, . "Identifying Fiscal Policy Shocks In Chile And Colombia," Borradores de Economia 397, Banco de la Republica de Colombia.
  9. Marcellino, Massimiliano, 2002. "Some Stylized Facts on Non-Systematic Fiscal Policy in the Euro Area," CEPR Discussion Papers 3635, C.E.P.R. Discussion Papers.
  10. 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.
  11. 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.
  12. Ignacio Lozano & Jorge Toro, . "Fiscal Policy Throughout the Cycle: The Colombian Experience," Borradores de Economia 434, Banco de la Republica de Colombia.
  13. Francisco de Castro, 2003. "The macroeconomic effects of fiscal policy in Spain," Banco de Espa�a Working Papers 0311, Banco de Espa�a.
  14. 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.
  15. Ignacio Lozano & Jorge Toro, 2007. "Fiscal Policy Throughout The Business Cycle: The Colombian Experience," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  16. King, R.G. & Baxter, M., 1990. "Fiscal Policy In General Equilibrium," RCER Working Papers 244, University of Rochester - Center for Economic Research (RCER).
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