The analysis in this chapter is consistent with a growing theoretical literature on the
effects of fiscal policy. DSGE models with nominal rigidities offer a rationale for fiscal
stabilisation policies. At the same time, these New Keynesian models consider both
supply and demand side effects of fiscal policy, and find the former to dominate. We find
that both the supply and demand effects of fiscal policy are important. The current
version of the model does not allow us quantifying the contribution of supply shocks. The
results suggest that the government budget can have long-term growth effects, but mostly
so in catching up countries as Portugal or Spain. More elaborate empirical models could
incorporate refinements in the compositional adjustment of budget balance. This would
allow for an explicit assessment of the channels through which fiscal policy transmits its
effects. Allowing for a different reaction of various budget items to demand and supply
shocks can be a first step in that direction. We think in particular of spending categories
that are considered productive (like government investment). This can verify some
endogenous growth theories of fiscal policy (Turnovsky, 2000). A major channel through
which fiscal policy acts is also the labour market, either directly - via wage spending or
public employment - or indirectly. Finally, instead of specifying a model in output and
fiscal policies only, the inclusion of prices and/or interest rates can lead to a more
accurate description of the economic shocks.
154