Effectiveness of fiscal policy on output and inequality in Colombia: 1990-2006

Abstract

This paper aims to demonstrate empirically the effects of fiscal policy on output and income distribution in Colombia for the period 1990-2006. It sought to establish whether fiscal policy has been effective in achieving stabilization of the economy and reducing distributive gaps. In order to carry out it uses a VAR model with quarterly reporting of spending and taxes from national government, real GDP and the Gini coefficient. This issue is relevant for at least two reasons. First, there appears to be no consensus among economist about the magnitude and the sign of the effects of fiscal policy, which is a good opportunity to provide evidence, marginally, on the subject for a developing country. Secondly, fiscal policy has been viewed as a good instrument to directly affect both in economic cycle as the inequality. Therefore, the inclusion of this latter variable in these models is a valuable manner to assess fiscal policy both from standpoint of their effectiveness in accomplishing this objective as to establish which instruments achieve this objective better.