Analysis of the dynamic effects of fiscal policy using a factor augmented VAR approach

The present master thesis analyzes the dynamic effects of fiscal policy on economic activity, by using a Factor Augmented Structural VAR approach. To achieve identification, contemporaneous timing restrictions are used. The results confirm the neoclassical view in some aspects, but the Keynesian view in others. As an example, the impulse response of GDP following a spending shock is negative, confirming the neoclassical view. However, the response of hours worked is also negative, which contradicts the neoclassical view