The Effects of Fiscal Policy on the Norwegian Economy : What are the impacts of fiscal policy on output and other macroeconomic variables in the Norwegian economy?

Abstract

This master thesis examines the effect of fiscal policy on various macroeconomic variables in the Norwegian economy, using the recursive approach within a Structural Vector Autoregressive (SVAR) model. The main point of focus is on the size and direction of the fiscal multipliers, i.e., the government spending multiplier and the tax multiplier. Additionally, we investigate the effect of fiscal policy on private consumption, private investment, and inflation. In the baseline model, we observe a small positive government spending multiplier and a small positive tax multiplier. Our findings are broadly consistent with previous literature and economic theory, except for one notable exception regarding the tax multiplier, which theory and literature suggest is negative. The effect remains largely unchanged when controlling for private investment, private consumption, inflation, and interest rate. Our results find that private consumption falls in response to the positive government spending shock and rises in response to a positive tax shock. The response to investment is more ambiguous and mostly statistically insignificant. The effect on inflation is negative following a tax shock and positive following a government spending shock. Overall, this research contributes to understanding the relationship between fiscal policy and macroeconomic variables in the Norwegian economy. However, the unexpected results of the tax multiplier highlight the complexities involved in accurately modeling and identifying the effects of fiscal policy shocks. Also, our findings highlight the limitations of the recursive approach and using Cholesky ordering when analyzing fiscal policy.