The Effects of Fiscal Policy Shocks on a Selected Group of Macroeconomic Variables in Lesotho: Evidence from SVAR Model

THIS PAPER investigates the macroeconomic effects of fiscal policy shocks in Lesotho on output gap, consumer prices, private and public gross fixed capital formation and the interest rate spread under a structural vector autoregression (SVAR) framework using annual time series data from 1982 to 2015. The main results of the study show that a positive shock to government expenditure leads to a significant positive response in inflation. However, the effect on all other variables is insignificant.

A positive shock to government revenue has no impact on the output gap and the interest rate spread but results in an increase in consumer prices, government expenditure as well as public and private gross fixed capital formation. It is recommended that government expenditure should be tilted towards the productive sectors of the economy. Government revenue should be increased by widening the revenue base and more efficient methods of revenue collection.