Time-Varying Impact of Fiscal Shocks over GDP Growth in Peru: An Empirical Application Using Hybrid TVP-VAR-SV Models

This paper estimates hybrid TVP-VAR-SV models suggested by Chan and Eisenstat (2018a) to identify and quantify the impact of fiscal shocks on GDP growth in Peru between 1995Q1–2018Q2. According to Bayesian criteria, the best models exhibit time-varying dynamics, but not necessarily in all parameters. Considering this result, our findings suggest that: (i) fiscal shocks are significant in the whole sample according to impulse response functions, forecast error variance decomposition and historical decomposition of GDP growth; (ii) tax revenue shocks are the least important and their impact is model dependent; (iii) expenditure shocks are relevant drivers of GDP growth; and (iv) expenditure multipliers, mainly for capital spending, have been growing over the last 20 years. We recommend constant revision of estimated fiscal multipliers and suggest that, in following years, fiscal policy in Peru should be mostly driven by capital expenditure.