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The use of SVAR analysis in determining the effects of ?scal shocks in Croatia

  • Rafael Ravnik

    (Croatian National Bank, Zagreb)

  • Ivan Zilic

    (student)

Registered author(s):

    In this paper we use multivariate Blanchard-Perotti SVAR methodology to analyze disaggregated short-term effects of fiscal policy on economic activity, inflation and short-term interest rates. The results suggest that the effects of government expenditure shocks and the shock of government revenues are relatively the highest on interest rates and the lowest on inflation. A tax shock in the short term increases the inflation rate and also decreases the short-term interest rate, and after one year stabilization occurs at the initial level, while spending shock leads to a reverse effect. The effects of fiscal policies on the proxy variable of output, i.e. industrial production, are less economically intuitive, because the shock of expenditure decreases and revenue shock permanently increases industrial production. The empirical result shows that a tax shock has a permanent effect on future taxes; while future levels of government spending are not related to current expenditure shocks. Interactions between the components of fiscal policy are also examined and it is concluded that a tax shock increases expenditures permanently, while an expenditure shock does not significantly affect government revenues, which is consistent with the tendency of growth in public debt. Furthermore, it was found that government revenue and expenditure shocks do not have a mirror effect, which justifies disaggregated analysis of fiscal policy shocks.

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    File URL: http://www.ijf.hr/eng/FTP/2011/1/ravnik-zilic.pdf
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    Article provided by Institute of Public Finance in its journal Financial Theory and Practice.

    Volume (Year): 35 (2011)
    Issue (Month): 1 ()
    Pages: 25-58

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    Handle: RePEc:ipf:finteo:v:35:y:2011:i:1:p:25-58
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    1. Francisco de Castro & Pablo Hernández de Cos, 2006. "The economic effects of exogenous fiscal shocks in Spain: a SVAR approach," Banco de Espa�a Working Papers 0604, Banco de Espa�a.
    2. 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.
    3. John W. Keating, 1992. "Structural approaches to vector autoregressions," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 37-57.
    4. Dario Caldara & Christophe Kamps, 2006. "What Do We Know About the Effects of Fiscal Policy Shocks? A Comparative Analysis," Computing in Economics and Finance 2006 257, Society for Computational Economics.
    5. António Afonso & Ricardo M. Sousa, 2009. "The Macroeconomic Effects of Fiscal Policy in Portugal: a Bayesian SVAR Analysis," Working Papers Department of Economics 2009/09, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
    6. Afonso, António & Sousa, Ricardo M., 2009. "The macroeconomic effects of fiscal policy," Working Paper Series 0991, European Central Bank.
    7. 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.
    8. Bernanke, Ben S. & Mihov, Ilian, 1997. "What does the Bundesbank target?," European Economic Review, Elsevier, vol. 41(6), pages 1025-1053, June.
    9. Favero, Carlo A., 2002. "How do European Monetary and Fiscal Authorities Behave?," CEPR Discussion Papers 3426, C.E.P.R. Discussion Papers.
    10. 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.
    11. repec:hal:journl:hal-00287137 is not listed on IDEAS
    12. McCoy, Daniel, 1997. "How useful is Structural VAR Analysis for Irish economics?," Research Technical Papers 2/RT/97, Central Bank of Ireland.
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