Time-varying effects of fiscal policy in Spain: a Markov-switching approach

ABSTRACT

How have the effects of Spanish fiscal policy varied over time? Given this starting point, in this article we analyse the regime dependence of fiscal policy in Spain by estimating a vector autoregressive model within a Markov-switching framework. Our results indicate that Spain’s membership of the Economic and Monetary Union (EMU) is the most likely source of time variation in the fiscal outcomes. Accordingly, increases in the primary deficit-to-GDP ratio do not succeed in stimulating economic activity in the first regime; rather, unexpected upsurges in the primary deficit harm economic activity (non-Keynesian effect) in the second regime, which prevails since the ratification of the Maastricht Treaty.

KEYWORDS:

• Fiscal policy
• fiscal regimes
• Markov-switching VAR
• Spain

JEL CLASSIFICATION:

• E62
• E63
• H20
• H50

Disclosure statement

No potential conflict of interest was reported by the authors.