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The macroeconomic effects of fiscal policy in Portugal: a Bayesian SVAR analysis

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Abstract

With a new quarterly dataset we estimate a Bayesian Structural Autoregression model and a Fully Simultaneous System approach to analyze the macroeconomic effects of fiscal policy. Results show that positive government spending shocks, in general, have a negative effect on real GDP; lead to “crowding-out” effects of private consumption and investment; have a persistent and positive effect on the price level and a mixed impact on the average financing cost of government debt. Explicitly considering the government debt dynamics in the model is also important. A VAR counter-factual exercise confirms that unexpected positive spending shocks create relevant “crowding-out” effects.

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Notes

  1. Christiano et al. (2005) identify the monetary policy shock using the same procedure.

  2. For instance, pension funds transfers from public sector enterprises to the civil servants pension system in 2004; securitization of tax credits in 2003; and tax amnesty in 2002.

  3. Guichard and Leibfritz (2006) also survey the reasons for the non-successful fiscal adjustment in the period 2002–2004.

  4. Since 2002, some public hospitals have been transformed into public corporations, to increase efficiency and decrease costs in the National Health Service (NHS). However, Afonso and Fernandes (2008) did not find, for the period 2000–2005, significant differences in efficiency between hospitals with public corporations status and Administrative Public Sector hospitals.

  5. Blanchard (2007) argues that discretionary fiscal policy was expansionary in Portugal in 1995–2001.

  6. The Portuguese Escudo effective exchange rate faced a devaluation of 17% and 23% respectively in 1982 and 1983, while Portugal undertook an IMF stabilisation programme.

  7. Additionally, in 1992 and in 1993 privatisation revenues amounting respectively to 1.5% and 0.4% of GDP were used for debt redemption. Coincidentally Portugal entered the ERM in April 1992, precisely the year were several currencies in the ERM system undergone speculative attacks, forcing both the Italian Lira and the British Pound out of the system after September 2002.

  8. The average government debt cost is obtained by dividing the net interest payments in t by the government debt at time t-1.

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Author information

Authors and Affiliations

  1. European Central Bank, Directorate General Economics, Kaiserstraße 29, 60311, Frankfurt am Main, Germany

    António Afonso

  2. Department of Economics; UECE—Research Unit on Complexity and Economics, ISEG/TULisbon—Technical University of Lisbon, R. Miguel Lupi 20, 1249-078, Lisbon, Portugal

    António Afonso

  3. Department of Economics and Economic Policies Research Unit (NIPE), University of Minho, Campus of Gualtar, 4710-057, Braga, Portugal

    Ricardo M. Sousa

  4. London School of Economics, Financial Markets Group (FMG), Houghton Street, London, WC2 2AE, UK

    Ricardo M. Sousa

Authors
  1. António Afonso
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  2. Ricardo M. Sousa
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Corresponding author

Correspondence to António Afonso.

Additional information

UECE and NIPE are supported by FCT (Fundação para a Ciência e a Tecnologia, Portugal), financed by ERDF and Portuguese funds.

We are grateful to Ad van Riet, to participants to the 4th Meeting of the Portuguese Economic Journal, and to an anonymous referee for helpful comments. The opinions expressed herein are those of the authors and do not necessarily reflect those of the ECB or the Eurosystem.

Appendix—data description and sources

Appendix—data description and sources

1.1 GDP

Data for GDP are quarterly, seasonally adjusted, and comprise the period 1978:1–2007:4. The source is the Bank of Portugal.

1.2 Private consumption

The source is the Bank of Portugal. Consumption is defined as the household consumption expenditure including non-profitable institutions serving households. Data are quarterly, seasonally adjusted, and comprise the period 1978:1–2007:4.

1.3 Price deflator

All variables were deflated by the GDP deflator (2,000 = 100). Data are quarterly, seasonally adjusted, and comprise the period 1978:1–2007:4. The source is the Bank of Portugal.

1.4 Private investment

The source is the Bank of Portugal. Private Investment is defined as total gross fixed capital formation. Data are quarterly, seasonally adjusted, and comprise the period 1978:1–2007:4.

1.5 Government spending

The source is the Bank of Portugal, collected from the Monthly Bulletin of the Directorate-General of Public Accounting. Government Spending is defined as Central Government primary spending (on a cash basis), that is, the difference between authorized expenditure and debt interest payments. We seasonally adjust quarterly data using Census X12 ARIMA, and the series comprise the period 1978:1–2007:4.

1.6 Interest payments

The source is the Bank of Portugal, collected from the Monthly Bulletin of the Directorate-General of Public Accounting. Interest Payments is defined as Central Government debt interest payments (on a cash basis). We seasonally adjust quarterly data using Census X12 ARIMA, and the series comprise the period 1978:1–2007:4.

1.7 Government revenue

The source is the Bank of Portugal, collected from the Monthly Bulletin of the Directorate-General of Public Accounting. Government Revenue is defined as Central Government total revenue (on a cash basis). We seasonally adjust quarterly data using Census X12 ARIMA, and the series comprise the period 1978:1–2007:4.

1.8 Government debt

The source is the Bank of Portugal, the Directorate-General of Treasury, and the Directorate-General of Public Credit. Government Debt is defined as the stock of Direct State Debt.

The original series are available as follows:

  1. 1.
    1. (a)

      Total Internal Debt, for the period 1997:12–1994:6, on a quarterly basis;

    2. (b)

      Internal Direct Debt, for the period 1997:12–1994:6, on a quarterly basis;

    3. (c)

      Total External Debt, for the period 1997:12–1994:6, on a quarterly basis;

    4. (d)

      Direct External Debt, for the period 1997:12–1994:6, on a quarterly basis;

    5. (e)

      Total Public Debt, for the period 1997:12–1994:6, on a quarterly basis;

    6. (f)

      Effective Public Debt, for the period 1997:12–1994:6, on a quarterly basis;

  2. 2.
    1. (a)

      Internal Effective Direct Debt, for the periods 1991:12, 1992:12, and 1993:6–1995:11, on a monthly basis;

    2. (b)

      Total Effective Direct Debt, for the periods 1991:12, 1992:12, and 1993:6–1995:11, on a monthly basis

  3. 3.
    1. (a)

      Internal Direct Debt, for the period 1995:7–1998:12, on a monthly basis;

    2. (b)

      Total Direct Debt, for the period 1995:7–1998:12, on a monthly basis

  4. 4.
    1. (a)

      Direct State Debt, for the period 1998:12–2007:4, on a monthly basis.

We build the series for the Direct State Debt as follows:

  1. (1)

    For the period 1998:12–2008:4, as the series of Direct State Debt itself;

  2. (2)

    For the period 1995:7–1997:12, we use the ratio of Direct State Debt to Total State Debt in 1998:12 (that is, a scale factor of 0.994679113), to back-out the series of Direct State Debt;

  3. (3)

    For the period 1993:6–1995:6, we use the ratio of Total Effective Direct State Debt to Total Direct State Debt in the period 1995:7–1995:11 (that is, a scale factor of 1.002277388), to back-out the series of Total Direct Debt;

  4. (4)

    For the period 1977:12–1993:3, we use the ratio of (Effective Public Debt minus Non-Direct Debt) to Total Effective Direct Debt in the period 1993:6–1994:6 (that is, a scale factor of 1.03997385), to back-out the series of Total Effective Direct Debt.

Given that the scale factors are very close to one, the time series of the Direct State Debt is smooth over time and we guarantee that there are not structural breaks.

We build the quarterly series using monthly data (where available) and seasonally adjust it using Census X12 ARIMA. The constructed series comprise the period 1977:4–2007:4.

1.9 Average cost of financing debt

The average cost of financing debt is obtained by dividing interest payments by debt at time t − 1.

1.10 Long-term interest rate

Long-Term Interest Rate corresponds to the yield to maturity of 10-year government securities. Data are quarterly, and comprise the period 1957:1–2007:4. Data for the period 1974:2–1975:4 is not available. Therefore, we linearly interpolate the data for that period using the observations at 1974:1 and 1976:1. The source is the IMF, International Financial Statistics (series “IFS.Q.182.6.61.$$$.Z.F.$$$”).

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Afonso, A., Sousa, R.M. The macroeconomic effects of fiscal policy in Portugal: a Bayesian SVAR analysis. Port Econ J 10, 61–82 (2011). https://doi.org/10.1007/s10258-011-0071-2

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