Journal
JOURNAL OF MONEY CREDIT AND BANKING
Volume 40, Issue 6, Pages 1239-1261Publisher
WILEY
DOI: 10.1111/j.1538-4616.2008.00155.x
Keywords
financial crisis; fiscal policy; Mexico
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In 1995 Mexico experienced its largest contraction of gross domestic product (GDP) since the early twentieth century. I propose a simple mechanism to partially account for the contraction: the effects of changes in fiscal policy. The contraction of GDP was preceded by a financial crisis. The government responded by raising taxes and reducing spending. Using a model with taxation and government consumption, and the business cycle accounting methodology, I measure the impact of fiscal policy. Fiscal policy accounts for 20.7% of the fall in output.
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