Understanding Fiscal Policy Shocks in Costa Rica

In this paper we employ a Structural Vector Autoregression(SVAR)technique to estimate and analyze the effects of government spending shocks on Gross Domestic Product (GDP) and the real exchange rate in Costa Rica. Our structural identification embraces that macroeconomic variables such as output and real exchange rate react immediately to fiscal policy shocks, whereas fiscal policy makers are not able to respond immediately to output shocks. Our main contribution is to find that changes in government consumption does not produce a significant eect on output and the real exchange rate. In addition, we find, through dierent simulations, that if the government reduces the spending rigidity, it could increase the contemporaneous relation between GDP and government expenditure substantially and, thus, expand the capacity of the government spending to foster economic activity.