The role of fiscal policy in offsetting idiosyncratic shocks has been widely debated among academics and policy-makers. Notwithstanding this, many economies around the world have adopted expansionary fiscal policies to help jolt economic activity during this time of global downturn. This study investigates whether fiscal policy in Barbados can be used as a countercyclical tool and the overall impact of expansionary policies on other macroeconomic variables. The structural vector autoregressive (SVAR) methodology was adopted and applied to quarterly data over the period 1980:1 to 2008:4. The empirical results suggested that fiscal policy can be counter-cyclical, at least in the short-term.
Fiscal Shocks - A Stabilization Tool.pdf