This study seeks to analyze the effects of government expenditure shock and tax revenue shock on economic activity by applying a time-varying parameter vector autoregressive methodology. The advantage of this approach is that it allows for fiscal policy shocks to vary over time according to the changes in the economic activity and permits us to capture the non-linear nature of the fiscal multiplier’s size. This paper provides an evaluation of the effects of fiscal policy in Romania, using quarterly data for three variables: GDP, government expenditure and tax revenues, from 2001q1 to 2013q3. The main results show that fiscal policy has a small effect on economic activity and that for the period considered the estimated coefficients do not show much time variation.
