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The macroeconomic effects of fiscal policy in Portugal: a Bayesian SVAR analysis

  • António Afonso

    ()

  • Ricardo Sousa

    ()

In the last twenty years Portugal struggled to keep public finances under control, notably in containing primary spending. We use a new quarterly dataset covering 1979:1-2007:4, and estimate a Bayesian Structural Autoregression model to analyze the macroeconomic effects of fiscal policy. The results show that positive government spending shocks, in general, have a negative effect on real GDP; lead to important "crowding-out" effects, by impacting negatively on private consumption and investment; and have a persistent and positive effect on the price level and the average cost of financing government debt. Positive government revenue shocks tend to have a negative impact on GDP; and lead to a fall in the price level. The evidence also shows the importance of explicitly considering the government debt dynamics in the model. Finally, a VAR counter-factual exercise confirms that unexpected positive government spending shocks lead to important "crowding-out" effects.

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File URL: http://hdl.handle.net/10.1007/s10258-011-0071-2
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Article provided by Springer in its journal Portuguese Economic Journal.

Volume (Year): 10 (2011)
Issue (Month): 1 (April)
Pages: 61-82

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Handle: RePEc:spr:portec:v:10:y:2011:i:1:p:61-82
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