The macroeconomic effects of government consumption in the portuguese economy

Abstract

This paper employs a Structural VAR technique to examine the macroeconomic effects ofgovernment consumption in the Portuguese economy. The key findings are as follows. An ex-pansionary government consumption shock triggers an increase in output, crowds-in privateconsumption, increases the long-term interest rate, decreases the international competitivenessby appreciating the real exchange rate and has a negative impact on the trade balance. Ad-ditionally, this paper also finds evidence that disposable income has an important role in thetransmission mechanism of fiscal shocks and that a significant portion of the fiscal stimulusleaks abroad.