The use of SVAR analysis in determining the effects of fiscal shocks in Croatia

Abstract

In this paper we use multivariate Blanchard-Perotti SVAR methodology to analyze disaggregated short-term effects of fiscal policy on economic activity, inflation and short-term interest rates. The results suggest that the effects of government expenditure shocks and the shock of government revenues are relatively the highest on interest rates and the lowest on inflation. A tax shock in the short term increases the inflation rate and also decreases the short-term interest rate, and after one year stabilization occurs at the initial level, while spending shock leads to a reverse effect. The effects of fiscal policies on the proxy variable of output, i.e. industrial production, are less economically intuitive, because the shock of expenditure decreases and revenue shock permanently increases industrial production. The empirical result shows that a tax shock has a permanent effect on future taxes; while future levels of government spending are not related to current expenditure shocks. Interactions between the components of fiscal policy are also examined and it is concluded that a tax shock increases expenditures permanently, while an expenditure shock does not significantly affect government revenues, which is consistent with the tendency of growth in public debt. Furthermore, it was found that government revenue and expenditure shocks do not have a mirror effect, which justifies disaggregated analysis of fiscal policy shocks.

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