Presentation Details

The Fourth International Conference on Knowledge, Culture and Change in Organisations

The Effects of Fiscal Policy on Output in a Structural VEC Model: Comparing four EMU and four non-EMU OECD Countries

Dejan Krusec.

This paper estimates the effects of government spending and taxation shock on the GDP in the three- and five-variable framework of structural Vector Error Correction (VEC) model using impulse response analysis for each of the EMU countries Austria, Germany, Italy and Finland and for each of four non-EMU OECD countries USA, Great Britain, Canada and Australia. The sVEC approach takes into account the integration properties of variables explicitly and allows identification of fiscal shocks without any disaggregation of variables or additional modelling assumption needed. In the first step the cointegration relationships are identified as government solvency condition and automatic stabilisation condition in the three-variable case and in addition Fisher relation in the five-variable case. The residuals VEC models are tested for non-normality, autocorrelation and ARCH effects. In the second step, the identification of fiscal shocks is achieved by distinguishing between permanent and transitory shocks and by assuming decision lags when implementing fiscal policy since the data is on quarterly basis. The paper uses recent developments in bootstrap methods to estimate confidence bounds in the impulse responses and procedures for insignificant parameters exclusion algorithms to increase the degrees of freedom when estimating the VEC models. The results show that a positive government spending shock increases GDP, while a positive tax shock has a rather insignificant effect on the GDP in a part of the sample while it has a negative effect in the other part. More specifically, a positive 1% government spending shock increases GDP at most by 0.5% at the impact in Finland, 0.5% after 8 quarters in Austria, 0.3% after 4 quarters in Italy, 0.21% at the impact in USA up to 1983, 0.7% at the impact for Australia and 0.5% two years after impact in Canada and 0.5% one year after impact in Great Britain.


Dejan Krusec  (Italy)
PhD Researcher in Economics
Department of Economics
European University Institute

Coming from Slovenia. Economics undergraduate in Maribor, Slovenia. Advanced Studies Program at the Institute of World Economics in Kiel finished. Since 2002 PhD Researcher in the Economics Department of the European University Institute in Florence, Italy.

  • Structural VEC Analysis
  • Fiscal Policy
  • Impulse Responses

(30 min. Conference Paper, English)