The macroeconomic effects of fiscal policy shocks in Sierra Leone : A structural vector autoregression approach

The aims of this paper are as follows: To examine the dynamic effects of discretionary fiscal policy shocks on key macroeconomic variables in Sierra Leone. Also, to empirically investigate which fiscal policy tool is most efficient for short-run macroeconomic stabilization in Sierra Leone. These objectives are explored within the context of a structural vector autoregression. The key findings are: Short-run government spending expansion significantly increases private consumption and output at the cost of higher inflation. Private investment is significantly crowded-in by spending expansion, exhibiting a link between investment and economic activity, and thus suggesting the existence of the acceleration hypothesis of investment in Sierra Leone. Private investment and output fall in response to tax increase. Also, government investment spending strongly stimulates the economy compared to government consumption expenditure. Government revenue increased in response to spending shock. This short-run response of revenue to spending expansion could be due to the positive reaction of output to government spending shock and/or the authorities’ willingness to finance the increased spending needs by the government. In the short-run, spending cuts seem plausible in achieving fiscal consolidation compared to tax increase. The findings validate the potency of fiscal policy to stabilize the economy in the short run