A Svar approach on fiscal policy: a case of Spain

Abstract

This paper aims to estimate the impact on economic activity of government fiscal policy shocks in Spain, and it is done on a VAR frame of reference for a 20 year period. Results show government spending shocks are highly persistent over time. Increases in both government spending and taxes are effective on stimulating economic activity on the short run. However, after two years, these shocks are found to have a less positive impact and dragging economic activity on the long term. Expenditure multiplier is found 4 times bigger than revenue multiplier after 2 years and it’s more effective on stimulating the economy at a cost of increasing debt. Finally, fiscal policy is also found more effective when the economy is in the low cycle