Keynesian or Ricardian?: effects of government spending shocks: the case of Mexico

Abstract

This dissertation investigates the macroeconomic effects of government spending shocks in Mexico for the period 1993-2017. Its objective is to elucidate whether macroeconomic variables behave in a Keynesian or Ricardian fashion after a fiscal stimulus. Through a structural vector autoregression (SVAR) framework, impulse response functions of output, consumption, the trade balance and the real exchange rate are built. Furthermore, following the methodology proposed by Ravn, Schmitt-Grohé, and Uribe (2012), the empirical observations are replicated through a dynamic stochastic general equilibrium (DGSE) model based on the deep habit mechanism. Both the empirical and the theoretical approach complement each other to analyse the macroeconomic effects of fiscal stimulus. Results show that a one-percent increase in government spending slightly raises output and private consumption contemporaneously. The trade balance and the real exchange rate, on the other hand, remain unchanged. In light of these results, macroeconomic variables in Mexico seem to behave in a Ricardian fashion after a shock to public spending.