A presentation by Morten Hansen and Elīna Veide (Fiscal Discipline Council of the Republic of Latvia) at the Workshop on Public Finances in Riga ob 21 June 2016

1. Evidence on the impact of fiscal
policy on key macroeconomic
variables in the Romanian
economy
By Alina-Gabriela Bobasu
Bank of Romania

2. Topic and methodology
• Assessment of the transmission mechanism of fiscal policy to real
economic activity
– special attention is paid to the magnitude of impact on consumption,
investment and trade balance.
• Focus on whether the hypothesis of twin deficits holds in the case of
small and open EU economies outside the euro area.
• Bayesian VAR framework is employed using different types of priors and
allowing for the exogeneity of an external block given the relatively high
degree of openness which characterizes the Romanian economy.

3. Main findings
• Small effect of the fiscal policy on both the expenditure and net
taxes side
– the most efficient instruments: compensation of employees and
indirect taxes (in small open economies fiscal policy has proved
rather inefficient during the years)
• Regarding the twin deficit hypothesis, the validity seem to hold
in case of government expenditure shocks
– highest impact on the trade balance: compensation of employees
shock. For other items the impact is insignificant
• The results are in line with other studies of emerging economies

4. Strengths
• The research topic is timely and has policy relevance
• Well-developed introduction and literature review – sets the stage for
the analysis and defines the stakes
• Methodology is described in detail and provides the reader with a
thorough understanding of the tools employed

5. Weakneses
• The argument of the paper could be defined more explicitly:
«[..] this paper tries to contribute to the literature focusing on fiscal
policy by investigating the impact of fiscal shocks on some key
macroeconomic variables in the Romanian economy using a Bayesian VAR
framework [..]»
• Section «Results» concentrates on description of method rather
than discusses results
• Conclusions are rather technical and the observations lack
ecnomic interpretation – i.e. what does it mean in practice?
«The results point towards a small effect of the fiscal policy on both
the expenditure and net taxes side with the most efficient instruments
being compensation of employees and indirect taxes.»
«Overall, the results indicate that the transmission of fiscal
stimulus, conditioned by the nature of the shock, exhibits significant
variability across demand components, which points to a
heterogeneous structure of fiscal multipliers.»

6. Uncertainties / Questions
• One of the views is that for economies with floating exchange rates
government spending won’t work as an economic stimulus, but create
exchange rate movement instead
– Was this taken into account when developing the paper?
• Why combine (1) fiscal transmission mechanism and (2) twin deficits
issue in one paper?

7. Thank you!
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