The Effects of Fiscal Policy on Economic Activity in Peru

The objective of this study is to estimate the effects of fiscal policy on economic activity in Peru. To this end, quarterly data covering the period 2000–2018 are used, and structural vector autoregressions (SVARs) are estimated. The identification of structural shocks is based on the methodology proposed by Blanchard and Perotti (2002), in which tax and public spending shocks are identified using a semi-structural model that takes into account lags in the implementation of fiscal policy and the elasticity of fiscal variables with respect to economic activity. The results indicate that an increase in spending has a positive, significant, and persistent effect on economic activity, while a higher tax burden has a negative, marginally significant, and temporary effect. It is also found that the impact of spending is greater than that of tax revenue, and that the impact of capital spending predominates over that of current spending. The results remain stable across different subsamples, different assumptions regarding the elasticity of tax revenue with respect to GDP, and different measures of GDP.