FISCAL POLICY SHOCK REACTIONS OF THE ECONOMY IN THE VAR MODEL

Abstract

This work presents the effects of various shocks on Thailand’s economic environment by utilizing Vector Autoregression (VAR) model with the quarterly modified data of Thailand, 2002:Q1-2019:Q2. This model shows the interactions between domestic variables (government spending, domestic price, consumption, investment, employment, and output) and the international related one (export and exchange rate) to present an open economy environment. The results from this work revealed that 1) government spending in the last period positively affected the current level of employment and negatively to the current level of consumption; 2) government spending in the last two period positively affected the current level of employment. However, it negatively affected the current level of domestic price and domestic consumption; 3) no evidence of exchange rate reaction to government spending and channel any effect of this spending to other variables. For the results obtained from variance decomposition and the impulse response analysis, we found that a unit shock of government spending can push down domestic price and consumption, but push up an exchange rate, employment, investment, export, and output, with time delay for some variable. Also, all of these variables oscillate and decline periodically to their equilibrium. According to the results produced from this work, we hence recommend the government authority to take into consideration the expectation dimension when designing the current fiscal policy. Also, it needs to launch a fiscal expansion policy to encounter an economic recession, while taking into account the crowding-out effect.