Fiscal multipliers in Malta

Abstract

This paper employs a Structural Vector Autoregression approach a la Blanchard and Perotti (2002) to investigate the impact of discretionary fiscal policy shocks on key macroeconomic variables in Malta. In order to gauge the quantitative impact of fiscal policy over the period 1995 to 2012, impact and cumulative multipliers are calculated. The response of GDP to government expenditure shocks and its components is low on impact but larger than one cumulatively. Moreover, private consumption responds positively to shocks in government spending, while private investment declines after a positive innovation to government expenditure. On the other hand, increases in net-taxation generate lower multipliers than shocks to government spending. This paper concludes that disposable income is the primary channel through which fiscal policy affects the real economy.