Macroeconomic Responses to Fiscal Shocks in Portugal

Summary:

This study analyses the impact of fiscal shocks on the Portuguese economy. We identify the response of GDP, inflation and interest rates to changes in public expenditure and revenue over 1995-2017. The study provides impulse responses over a horizon of four years, which allows examining the short-term impact and the persistence of the impact over time. In line with the relevant literature, we estimate multipliers using a structural VAR where restrictions have been imposed following Blanchard and Perotti (2002) and we use OECD elasticities for the estimation. While the analysis of output multipliers compares well with some other studies conducted on the Portuguese economy, our study is one of the first to focus also on the implications of fiscal shocks on inflation and long term interest rates. This side of the analysis is relevant for countries, like Portugal, that display high debt levels and volatile market sentiment and lack an independent monetary policy.

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