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Regime-Switching, Stochastic Volatility, Fiscal Policy Shocks and Macroeconomic Fluctuations in Peru

Author

Listed:
  • Gabriel Rodriguez

    (Departamento de Economía de la Pontificia Universidad Católica del Perú)

  • Joseph Santisteban

    (Departamento de Economía de la Pontificia Universidad Católica del Perú)

Abstract

Following Chan and Eisenstat (2018a), we use a family of regime-switching models with time-varying parameters and stochastic volatility (RS-VAR-SV) to analyze the evolution of fiscal shocks impacts on Peru's economic growth from 1995Q1 to 2019Q4. Key findings include: (i) identification of two distinct economic regimes with different macroeconomic fundamentals tied to improvements in fiscal and monetary policy; (ii) enhanced model fi with the inclusion of stochastic volatility; (iii) a positivetrend in the size of spending multipliers, though they remain below unity; (iv) during the 2008 Global Financial Crisis, capital expenditure shocks mitigated the decline in economic growth by 2 percentage points, highlighting their counter-cyclical potential. These findings are corroborated by robustness checks, which include changes in priors, variable reordering, adjustments in external and demand variables, andextending the sample to 2022Q4 to encompass the COVID-19 crisis. Palabras claves: Regime-Switching Models, Fiscal Multipliers, Marginal Likelihood, Cross-Entropy, Bayesian, Model Comparison, Peruvian Economy, Stochastic Volatility. JEL Classification-JE: C11, C32, C52, E62, H30.

Suggested Citation

  • Gabriel Rodriguez & Joseph Santisteban, 2024. "Regime-Switching, Stochastic Volatility, Fiscal Policy Shocks and Macroeconomic Fluctuations in Peru," Documentos de Trabajo / Working Papers 2024-539, Departamento de Economía - Pontificia Universidad Católica del Perú.
    • Handle: RePEc:pcp:pucwps:wp00539
    DOI: 10.18800/2079-8474.0539
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    Keywords

    Regime-Switching Models; Fiscal Multipliers; Marginal Likelihood; Cross-Entropy; Bayesian; Model Comparison; Peruvian Economy; Stochastic Volatility.;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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