The Dynamic Effects of Countercyclical Fiscal Stimulus On Output in Tunisia

With the global financial crisis hitting many countries, policymakers around the world have been weighing different countercyclical policies to support aggregate demand and restore growth. The analysis in this paper estimates a Structural Vector Error Correction model for Tunisia in order to identify the impact of fiscal policy shocks on real output. The authors find that public investment has a small impact on output in the short run but is an important medium-term growth-enhancing countercyclical instrument that has a robust impact on growth. Raising public investment by 1 dinar yields 0.12 dinar the first year, 0.30 dinar the second year, half a dinar the third year, and 1.08 dinars the sixth year. An increase in recurrent expenditure has a smaller but positive and persistent impact on real output. For Tunisia to obtain a larger short-term impact of public spending on output, procurement processes should be made faster and simpler. Finally, the analysis finds a countercyclical pattern of real public investment vis-à-vis real output and a relative rigidity/inelasticity of recurrent expenditures to output fluctuations