The fiscal policy impact to the Greek economy: Asymmetric evidence from a switching regime approach

Abstract. This paper empirically investigates the magnitude of general government expenditures and tax income revenues to the Greek output within a regime-switching framework during the period 2000:1 – 2016:3. This nonlinear methodology captures the fiscal effects across periods of high and low growth. In more deep analysis, we examine the relationship of expenditures and GDP over time, by adopting the GARCH(1,1)-DCC methodology. Our results show that the magnitude of general government expenditures is larger during periods of low growth or economic recession, as well as the magnitude of tax income revenues. Furthermore, during the “bailout” period (2010-2016) when the fiscal adjustment was strict, GDP seem to be even stronger negatively affected by the reduction of government expenditures. Keywords. Fiscal policy impact, regime switching, GARCH-DCC, Greek economy. JEL. E61, E62, H21.