Growth enhancing effect of discretionary fiscal policy shocks: Keynesian, Weak Keynesian or Non-Keynesian?

Şen, Hüseyin and Kaya, Ayşe (2015): Growth enhancing effect of discretionary fiscal policy shocks: Keynesian, Weak Keynesian or Non-Keynesian?

Abstract

Using the extended version of the Blanchard and Perotti SVAR technique, this paper attempts to empirically predict the growth enhancing effect of discretionary fiscal policy shocks in both short- and long-run in Turkey over the period 2006:Q1-2015:Q1. Unlike previous studies which have mainly focused on fiscal policy instruments - taxes and government spending - at the aggregate level, this paper considers these instruments at the component level, and then attempts to analyze comparatively the effect of changes in each component on growth. The findings of the paper show that growth enhancing effect of discretionary fiscal policy shocks varies according to its components. However, discretionary fiscal policy shocks at the component level indicate mixed results. In the short-run, only the shocks to government spending have a Keynesian effect. In all other cases, discretionary fiscal policy shocks seem to capture a weak Keynesian and/or non-Keynesian effect in the case of Turkey.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fiscal Policy, Economic Growth, Fiscal Stimulus Packages, Fiscal Multiplier, Keynesian Effect, Non-Keynesian Effect, Weak Keynesian Effect, SVAR Technique, Turkey.
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E27 - Forecasting and Simulation: Models and Applications; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H2 - Taxation, Subsidies, and Revenue; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General

References

Afonso, A. and Sousa, R. M. (2011), “The Macroeconomic Effects of Fiscal Policy in Portugal: A Bayesian SVAR Analysis”, Portuguese Economic Journal, Vol: 10(1), pp.61-82.

Afonso, A. and Sousa, R. M. (2012), “The Macroeconomic Effects of Fiscal Policy”, Applied Economics, Vol:44, Issue: 34, pp. 4439-4454.

Ahumada, V. M. C. (2009), “The Short-Term Effects of Fiscal Policy in Mexico: An Empirical Study”, Estudios Económicos, Vol: 24, No:1(47), pp.109-144.

Alesina, A. (2012), “Fiscal Policy after the Great Recession”, Atlantic Economic Journal, Vol: 40, pp.429-435.

Alesina, A. and Ardagna, S. (1998), “Tales of Fiscal Contractions”, Economic Policy, Vol: 13, No: 27, pp.487-545.

Alesina, A. and Ardagna, S. (2010), “Large Changes in Fiscal Policy: Taxes versus Spending”, Tax Policy and the Economy, Vol: 24, No: 1, pp.35-68.

Alesina, A. and Perotti, R. (1997), "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects", IMF Staff Papers, Vol: 44(2), pp.210-248.

Ali, S. and Ahmad, N. (2010), “The Effects of Fiscal Policy on Economic Growth: Empirical Evidences Based on Time Series Data from Pakistan”, The Pakistan Development Review, Vol: 49, No: 4, pp.497-512.

Arcangelis, G.D. and Lamartina, S. (2003), Identifying Fiscal Shocks and Policy Regimes in OECD Countries, European Central Bank Working Paper Series, No: 281, p.51.

Arestis, P. (2011), “Fiscal Policy is Still an Effective Instrument of Macroeconomic Policy”, Panoeconomicus, Vol: 58, Issue: 2, pp.143-156.

Auerbach, A. J., Gale, W. G. and Harris, B. H. (2010), “Activist Fiscal Policy”, Journal of Economic Perspectives, Vol: 24, No: 4, pp.141-164.

Auerbach, A.J. and Gorodnichenko, Y. (2012), “Measuring the Output Responses to Fiscal Policy”, American Economic Journal: Economic Policy, Vol: 4(2), pp.1-27.

Barro, R. J. and Redlick, C. J. (2011), “Macroeconomic Effects from Government Purchases and Taxes”, The Quarterly Journal of Economics, Vol: 126, pp.51-102.

Baxter, M. and King, R. (1993), “Fiscal Policy in General Equilibrium”, American Economic Review, Vol: 83(3), pp.315-334.

Blanchard, O. and Perotti, R. (2002), “An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output”, Quarterly Journal of Economics, Vol: 117, pp.1329-1368.

Ben-Sliamne, S., Ben-Tahar, M., and Essid, Z. (2011), “Effects of Discretionary Fiscal Policy in Tunisia: A SVAR Model Investigation”, Topics in Middle Eastern and African Economies, Vol: 13, pp.1-21.

Briotti, M. G. (2005), Economic Reactions to Public Finance Consolidation: A Survey of the Literature, European Central Bank Occasional Paper Series, No: 38, p.29.

Caggiano, G., Caltelnuovo, E., Colombo, V. and Nodari, G. (2015), “Estimating Fiscal Multipliers: News from a Non-linear World”, The Economic Journal, Vol: 125, No:584, pp.746-776.

Caldara, D. and Kamps, C. (2008), What are the Effects of Fiscal Policy Shocks? A VAR-Based Comparative Analysis, European Central Bank Working Paper Series, No: 877, p.45.

Candelon, B. and Lieb, L. (2013), “Fiscal Policy in Good and Bad Times”, Journal of Economic Dynamics & Control, Vol: 37, pp.2679-2694.

Cerda, A.R., González, H., and Lagos, F.L. (2006), “Is Fiscal Policy Effective? Evidence for an Emerging Economy: Chile 1833-2000”, Applied Economics Letters, Vol:13, pp. 575-580.

Coenen, G., Straub, R. and Trabandt, M. (2012a), “Fiscal Policy and the Great Recession in the Euro Area”, American Economic Review, Vol:102(3), pp. 71-76.

Coenen, G., Erceg, C. J., Freedman, C., Furceri, D., Kumhof, M., Lalonde, R., Laxton, D., Lindé, J., Mourougane, A., Muir, D., Mursula, S., de Resende, C., Roberts, J., Roeger, W., Snudden, S., Trabandt, M. and in't Veld, J. (2012b), “Effects of Fiscal Stimulus in Structural Models”, American Economic Journal: Macroeconomics, Vol: 4(1), pp. 22-68.

Cottarelli, C. and Jaramillo, L. (2012), Walking Hand in Hand: Fiscal Policy and Growth in Advanced Economies, IMF Working Paper, No: WP/12/137, p.28.

Çebi, C. (2010), “The Effects of Fiscal Policy Shocks on Output in Turkey: SVAR Analysis”, İşletme İktisat ve Finans, Vol: 25(290), pp. 9-34.

Çebi, C. (2015), Government Spending Multiplier in Turkey, Central Bank of the Republic of Turkey, Working Paper Series, No: 15/15, p.20.

de Castro, F. (2006), “The Macroeconomic Effects of Fiscal Policy in Spain”, Applied Economics, Vol: 38, Issue: 8, pp. 913-924.

Fatas, A. and Mihov, I. (2003), “The Case for Restricting Fiscal Policy Discretion”, The Quarterly Journal of Economics, Vol: 118(4), pp.1419-1447.

Feldstein, M. (2009), “Rethinking the Role of Fiscal Policy”, American Economic Review, Vol: 99(2), pp.556-559.

Hemming, R., Kell, M., and Mahfouz, S. (2002), The Effectiveness of Fiscal Policy in Stimulating Economic Activity -A Review of the Literature, IMF Working Paper, No: WP/02/208, p.53.

Gemmell, N. (2011), “Can a Fiscal Stimulus Boost Economic Growth Rates? Introduction”, The Economic Journal, Vol: 121, F1-F3.

Gemmell, N. Kneller, R., and Sanz, I. (2011), “The Timing and Persistence of Fiscal Policy Impacts on Growth: Evidence from OECD Countries”, The Economic Journal, F33-F58.

Giavazzi, F. and Pagano, M. (1990), “Can Severe Fiscal Contractions be Expansionary? Tales of Two Small European Countries”, NBER Macroeconomic Annual, Vol: 5, pp.75-110.

Giordano, R., Momigliano, S., Neri, S. and Perotti, R. (2007), “The Effects of Fiscal Policy in Italy: Evidence from a VAR Model”, European Journal of Political Economy, Vol: 23, Issue: 3, pp.707-733.

Ilzetzki, E., Mendoza, E. G. and Végh, C. A. (2013), “How Big (Small?) are Fiscal Multipliers?”, Journal of Monetary Economics, Vol: 60(2), pp. 239-254.

IMF (2008), Fiscal Policy as a Countercyclical Tool, in World Economic Outlook, Chapter 5, International Monetary Fund: Washington D.C., pp.159-196.

Jha, S., Mallick, S. K., Park, D. and Quising, P. (2014), “Effectiveness of Countercyclical Fiscal Policy: Evidence from Developing Asia”, Journal of Macroeconomics, Vol: 40, pp.82–98.

Kneller, R., Bleaney, M. F., and Gemmell, N. (1999), “Fiscal Policy and Growth: Evidence from OECD Countries”, Journal of Public Economics, Vol: 74, Issue: 2, pp.171-190.

Kuismanen, M. and Kämppi, V. (2010), “The Effects of Fiscal Policy on Economic Activity in Finland”, Economic Modelling, Vol: 27(5), pp.1315-1323.

Lozano, I. and Rodrı´guez, K. (2011), “Assessing the Macroeconomic Effects of Fiscal Policy in Colombia”, Journal of Financial Economic Policy, Vol: 3, No: 3, pp. 206-227.

MacKinnon, J.G. (1991), Critical Values for Cointegration Tests, in: R. F. Engle and C. W. J. Granger (eds.), Long-run Economic Relationships, Oxford: Oxford University Press.

Mitra, P. and Poghosyan, T. (2015), Fiscal Multiplier in Ukraine, IMF Working Paper, No: WP/15/71, p.17.

Mountford, A. and Uhlig, H. (2009), “What are the Effects of Fiscal Policy Shocks?”, Journal of Applied Econometrics, Vol: 24(6), pp.960-992.

Pereira, A. M. and Roca-Sagalés, O. (2011), “Long-Term Effects of Fiscal Policies in Portugal”, Journal of Economic Studies, Vol: 38, Issue: 1, pp.114-127.

Perotti, R. (2005), Estimating the Effects of Fiscal Policy in OECD Countries, Center for Economic Policy Research, CEPR Discussion Paper, No: 4842, p.62.

Ramey, V. A. (2011), “Identifying Government Spending Shocks: It’s All in the Timing”, Quarterly Journal of Economics, Vol: 126(1), pp.1-50.

Ramey, V. A. and Shapiro, M. (1998), “Costly Capital Reallocation and the Effects of Government Spending”, Carnegie Rochester Conference on Public Policy, Vol: 48, pp.145-194.

Riera-Crichton, D. Vegh, C. A. and Vuletin, G. (2014), “Fiscal Multipliers in Recessions and Expansions: Does It Matter Whether Government Spending is Increasing or Decreasing?”, World Bank Group Policy Research Working Paper, No: 6993, p.35.

Roeger, W. and in't Veld, J. (2010), Fiscal Stimulus and Exit Strategies in the EU: A Model-based Analysis, European Commission Economic Papers, No: 426, pp.36.

Romer, C. D., and Romer, D. H. (2010), “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks”, American Economic Review, Vol:100, pp.763-801.

Siwińska, J. and Bujak, P. (2003), Short-run Macroeconomic Effects of Discretionary Fiscal Policy Changes, Center for Social and Economic Research, Studies & Analyses, No:261, p.32.

Sola, S. (2013), Temporary and Persistent Fiscal Policy Shocks, The Graduate Institute of International and Development Studies, Working Paper, No: 06/2013, p. 51.

Spilimbergo, A., Symansky, S. and Schindler, M. (2009), Fiscal Multipliers, IMF Staff Positions Note, SPM: 09/11, May 20, 2009, International Monetary Fund: Washington D.C.

Tang, H. C., Liu, P. and Cheung, E. C. (2013), “Changing Impact of Fiscal Policy on Selected ASEAN Countries”, Journal of Asian Economics, Vol: 24, pp.103-116.

Yadav, S., Upadhyay, V. and Sharma, S. (2012), “Impact of Fiscal Policy Shocks on the Indian Economy”, The Journal of Applied Economic Research, Vol: 6 (4), pp.415-444.