Unveiling the macroeconomic effects of fiscal policy shocks in Rwanda

Abstract

This study investigates the macroeconomic effects of fiscal policy shocks in Rwanda over the period 2006-2023. Using structure Vector Autoregression (SVAR) models, the analysis explores the dynamic interactions among key economic variables, including GDP growth, government expenditure, inflation, and interest rates, in response to fiscal policy adjustments. The findings reveal that fiscal expansions generally stimulate short-term economic growth, as evidenced by increases in GDP and government expenditure. However, these expansions also pose challenges, including inflationary pressures and potential fiscal sustainability risks. The stability observed in interest rates suggests effective monetary policy coordination, critical for mitigating adverse effects of fiscal shocks. Moreover, the persistence of shocks in GDP and government expenditure underscores the lasting impact of fiscal decisions on economic stability, necessitating strategic policy responses. Based on these insights, recommendations include diversifying the economy, prioritizing structural reforms, fostering inclusive growth, and developing a comprehensive long-term fiscal strategy. These measures aim to strengthen Rwanda's resilience to economic shocks, promote sustainable development, and achieve inclusive socio-economic growth.