Confidence and the transmission of government expenditure shocks: the case of Portugal

Abstract

This thesis investigates the confidence channel through which shifts in government expenditure can affect the Portuguese economic activity, using a linear structural Vector Autoregressive model from 1995 to 2016. The impulse responses are constructed to analyze the impact of government spending measures on output, in a model where confidence is not included, to isolate the direct effect of government expenditure on output, and in a model with confidence, to account for an indirect effect through confidence. Overall, the findings suggest that neither consumer confidence nor business confidence play a crucial role in the propagation of public spending shocks into output.