Abstract
In order to determine the effectiveness of Costa Rica’s fiscal policy, we use a structural autoregressive vector model with quarterly data from 1991 to 2018 to estimate its multipliers. From the results, it is possible to conclude that a more flexible expenditure improves fiscal policy effectiveness, and that the effect of increments in taxes is negative on output and highly time persistent. The analysis is complemented with the results of a smooth transition autoregressive vector model, for different output scenarios (over and under potential growth), which shows that increments in government consumption and capital expenditure have different impact given the economic cycle; it is positive during recessions but negative in expansions. A possible explanation for the latter is the high fiscal deficit, which channels the transmission mechanism through negative expectations and crowding-out effects. Finally, given our estimations, there is an intuitive fiscal policy recommendation of an expansionary fiscal policy through increases in government consumption or capital expenditures may help overcome a crisis, but special attention should be drawn towards its funding and temporal validity.
