What are the macroeconomic effects of fiscal policy?

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22nd Jun 2020 Business Question Reference this

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Question

What are the macroeconomic effects of fiscal policy?

Answer

In evaluating the macroeconomic effects of fiscal policy, it is important to consider certain fiscal policy shocks through the implementation of a recursive partial identification. It appears that government spending shocks have an insignificant effect on a country’s GDP. At the same time, it can be pointed out that fiscal policy does not impact private consumption patterns, but it has a negative impact on private investments (Houndonougbo and Mohsin, 2016). As a result of the quick fall in stock prices, it can be further argued that the macroeconomic effects of fiscal policy on housing prices are quite varied. In line with the substantial effects emerging from the implementation of fiscal policy, it is important to recognise the influence of debt dynamics, long-term interest rates and specific GDP levels (Dufrenot et al., 2016). In this context, it has become possible to identify fiscal shocks through exploiting decision lags in terms of fiscal policymaking processes. In relation to macroeconomic variables, which are closely related to a country’s fiscal policy, it has become possible to determine discretionary government purchases and revenues, indicating the adoption of a flexible approach in understanding the macroeconomic factors leading to the formulation of better fiscal policy. Details pertaining to the elasticity of fiscal variables can be extensively used to assess particular economic activities as part of the automatic response of fiscal policy (Houndonougbo and Mohsin, 2016). The ultimate goal is to understand the relationship between fiscal policy and asset markets, which can help professionals in the field devise optimal fiscal strategies based on certain macroeconomic variables such as GDP and interest rate. Uncovering viable alternative approaches has turned out an important initiative to evaluate the robust dimensions of the impact of fiscal policy on various asset markets (Dufrenot et al., 2016).

References

Dufrenot, G. Gente, K. Monsia, F. (2016). Macroeconomic imbalances, financial stress and fiscal vulnerability in the euro area before the debt crisis: A market view. Journal of International Money and Finance. 67(1) 123-146. Houndonougbo, A. N. Mohsin, M. (2016). Macroeconomic effects of cost equivalent business fiscal incentives. Economic Modelling. 56(1) 59-65.

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