The Macroeconomic Effects of Fiscal Policy Shocks: A Review of the Literature

Abstract

In this chapter we provide a review of the literature using multivariate time series techniques, and in particular structural VARs and panel VARs, to study the effects of fiscal policy shocks on macroeconomic variables. In the last decades the traditional Keynesian view on fiscal policy as a useful tool for macroeconomic stabilization has been challenged on the ground of possible expansionary effects associated with fiscal consolidations. However, as will be seen, recent research shows heterogeneous results. It seems possible at this stage to identify an emerging consensus, related to the conclusion that the size of fiscal multipliers, i.e. the size of the response of output to exogenous changes in government expenditures or revenues, is significantly affected by some selected macroeconomic factors. Among these factors, country financial conditions are particularly relevant in the context of the present research, since they are closely related to the levels of public and private indebtedness as measured by debt-to-GDP ratios.