The effects of fiscal policy on the Spanish economy

What is it about?

Can fiscal policy help to the ending of the economic crisis affecting Spain? Given this starting point,we study the effects on the Spanish economy of a shock to total public receipts or a shock to total public expenditure. With that objective in mind, we specify and estimate a vector error correction model withexogenous variables, using quarterly monetary and fiscal data for the Spanish economy from 1978 to 2009.The results of our simulations show that the effects of shocks to Spanish total government receipts and total government expenditure on real variables are permanent, while their effects on nominal variables are temporary. The response of the Spanish real GDP to a positive shock to total government receipts is positive. In contrast, the response of the Spanish real GDP to a positive shock to total government expenditure ispositive in the short run, but negative in the medium to long run. Consequently, these results suggest the existence of non-Keynesian effects related to a disturbance on public receipts and the presence of short-run Keynesian effects related to a disturbance on public expenditure. Both facts must be taken into account when formulating appropriated economic policy measures.

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Photo by Chiara Daneluzzi on Unsplash

Photo by Chiara Daneluzzi on Unsplash