The economic effects of exogenous fiscal shocks in Spain: a SVAR approach

This paper estimates the effects of exogenous fiscal policy shocks in Spain in a VAR framework. Government expenditure expansionary shocks are found to have a positive impact on output in the short term at the cost of higher inflation and public deficits and lower output in the medium and long term. Tax increases are found to have a negative impact on economic activity in the medium term while having only a temporary effect on the improvement of the public deficit. The application of these results to the analysis of fiscal policy in Spain since the mid nineties point to the conclusion that the consolidation process does not seem to have involved costs in terms of output growth and the stance of fiscal policy has become more counter cyclical.