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Effects of fiscal shocks in new EU members estimated from a SVARX model with debt feedback

Stanova, Nadja (2015): Effects of fiscal shocks in new EU members estimated from a SVARX model with debt feedback.

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Abstract

This paper analyses in a VAR framework with debt feedback effects of fiscal policy over 1999q1 to 2013q4 in six Central and East European economies: Slovakia, Czech republic, Hungary, Poland, Slovenia and Lithuania. The way the debt feedback is accounted for as well as the nonlinearities operating behind the government budget constraint matter for the understanding of the effects of fiscal policy shocks. The debt feedback dampens the effects on output and eliminates persistence in the responses over longer horizons. Simulations starting from various levels of the debt ratio suggest that high government indebtedness might imply a sacrifice in the policy effectiveness on output over the medium term. Simulated out-of-sample debt paths are stabilised if debt feedback is included, but strongly explosive otherwise.

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