Macroeconomic Impact of Fiscal Policy Shocks in Burundi: Evidence from a Structural VAR Approach

Abstract

Considering the vital importance of fiscal policy in maintaining stability and fostering economic growth, it is essential to thoroughly assess how fiscal policy shocks influence macroeconomic dynamics. This study examines how fiscal policy shocks affect real output, inflation (as captured by the price index), and real interest rates in Burundi, using a structural VAR model with quarterly data from 2010 to 2022. The findings indicate that public expenditure shocks lead to a short-term boost in economic activity and an increase in tax revenues, while their influence on inflation remains limited. Nonetheless, the positive effect on output diminishes over time due to decreasing marginal returns. Additionally, the observed decline in real interest rates points to a supportive stance in monetary policy. Conversely, tax revenue shocks tend to drive up public spending and generate a moderate but rising inflationary impact. They also contribute to stabilizing interest rates and support more sustained economic growth compared to spending shocks. Variance decomposition confirms the key role of tax revenues in output fluctuations. These findings emphasize the importance of fiscal policy choices in shaping economic outcomes and highlight the need for strong coordination between fiscal and monetary policies to preserve macroeconomic stability.

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