1 A VAR Analysis of the Effects of Fiscal

This paper presents an analysis of the effects of fiscal policy in Germany based on a structural VAR approach. Fiscal policy shocks are identified as the structural residuals related to unexpected government expenditure and tax revenues. Impulse responses are then used to simulate the dynamic response of key macroeconomic variables to these shocks. The analysis shows a negative response of GDP to tax shocks and a positive to expenditure shocks. Moreover private consumption reacts negatively to taxation but increases in response to a shock to public expenditure. Altogether the results are consistent with Keynesian models of the business cycle