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Characterization of the Dynamic Effects of Fiscal Shocks in a Small Open Economy

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  • Nooman Rebei

Abstract

The author studies the macroeconomic consequences of discretionary changes in the fiscal policy instruments for Canada. He adopts a semi-structural vector autoregression framework. Restrictions are based on institutional interactions between some policy and non-policy instruments that mimic a government's decision process. The author characterizes the actual economy's response to fiscal shocks, and proposes a theoretical model for a small open economy with nominal and real rigidities to test for the endogenous transmission mechanisms following shocks to government spending. He pursues a limited-information econometric strategy by comparing the theoretical impluse-response functions with the empirical ones, capturing the effects of a disturbance in government spending. Generally, the results of the model are very close to the observed reactions, especially for consumption, investment, exports, imports, and inflation; however, the model fails to predict the real exchange rate reaction.

Suggested Citation

  • Nooman Rebei, 2004. "Characterization of the Dynamic Effects of Fiscal Shocks in a Small Open Economy," Staff Working Papers 04-41, Bank of Canada.
    • Handle: RePEc:bca:bocawp:04-41
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    References listed on IDEAS

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    Cited by:

    1. Rajesh Singh & Chetan Subramanian, 2008. "The optimal choice of monetary policy instruments in a small open economy," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 41(1), pages 105-137, February.
    2. Nilsson, Kristian, 2008. "Conceptual Framework for Fiscal Policy," Occasional Papers 16, National Institute of Economic Research.
    3. Janusz Jabłonowski, 2018. "Implications of Transitory and Permanent Changes in Tax Rates for Poland," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 2, pages 73-97.

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    More about this item

    Keywords

    Economic models; Exchange rates; Fiscal policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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