Evolving impacts of fiscal policy on macroeconomic fluctuations in Peru

Abstract

This study assesses the evolving impact of fiscal policy on Peru’s economic activity in 1995Q1-2018Q2 using unrestricted and restricted TVP-VAR-SV models as proposed by Chan and Eisenstat (2018a). The results highlight the necessity of including stochastic volatility, although there is no clear evidence for time-varying parameters. Shocks from government consumption growth and public investment growth significantly influence the forecast error variance decomposition and the historical decomposition of GDP growth. Conversely, the impact of tax revenue shocks remains weak throughout the study period. The public investment multiplier exceeds that of government consumption although both are less than 1, suggesting a limited capacity of fiscal policy to stimulate economic activity. The study also finds that external shocks (export price index growth) have a strong and positive impact on tax revenue growth. A series of robustness exercises further confirms these results.