What are the effects of fiscal policy shocks? (original) (raw)

The macroeconomic effects of fiscal policy

Applied Economics, 2011

We investigate the macroeconomic effects of fiscal policy using a Bayesian Structural Vector Autoregression (B-SVAR) approach. We identify fiscal policy shocks via a partial identification scheme, but also: (i) include the feedback from government debt; (ii) look at the impact on the composition of output; (iii) assess the effects on asset markets; (iv) use quarterly data; and (v) analyse empirical evidence from the US, the UK, Germany and Italy. The results show that government spending shocks, in general, have a small effect on Gross Domestic Product (GDP); lead to important ‘crowding-out’ effects; have a varied impact on housing prices and generate a quick fall in stock prices. Government revenue shocks generate a mixed effect on housing prices and a small and positive effect on stock prices. The empirical evidence also suggests that it is important to explicitly consider the government debt dynamics in the model.

Assessing the Macroeconomic Effects of Fiscal

2009

The focus of this paper is on the short-term macroeconomic effects of fiscal policy in Colombia in a structural vector autoregression context. Government spending shocks are found to have positive and significant effects on output, private consumption, employment, prices and short-term interest rates. The cumulative output multiplier fluctuates between 1.12 and 1.19 from the first to third year after the spending innovation. Shocks to direct taxation seem to be less efficient, because they mainly affect private investment, whereas shocks to indirect taxation do not seem to affect real activities significantly. From a policy perspective, our results support the smoothing role of fiscal policy on output fluctuations, which implies its capacity to restore real activity effectively in critical times like the ones currently being forecast. From a theoretical standpoint, the results are consistent with real business cycle and Keynesian models of both traditional partial equilibrium and new general equilibrium types. some of these programs are essential for the performance of the economy, but others may not be. Essential spending can directly raise the human and physical capital stock and technical progress in the economy, but it can also do so indirectly by creating synergies for private activities.

Measuring the Effects of Fiscal Policy

2009

This paper evaluates the effects of fiscal policy in the U.S. using a novel empirical methodol- ogy. It estimates a flexible structural vector autoregression that relaxes the commonly imposed restrictions to identify government spending and tax shocks. Identification is instead achieved through the conditional heteroscedasticity of the structural disturbances. Our specification nests as special cases thoses proposed in earlier studies

In search of the transmission mechanism of fiscal policy

2007

Most economists would agree that a hike in the federal funds rate will cause some slowdown in growth and in ‡ation, and that the bulk of the empirical evidence is consistent with this statement. But perfectly reasonable economists can and do disagree even on the basic e¤ects of a shock to government spending on goods and services: neoclassical models predict that in general private consumption and the real wage will fall, while some neo-keyenesian models predict the opposite. This paper discusses alternative time series methodologies to identify government spending shocks and to estimate their e¤ects. Applying these methodologies to data from the US and three other OECD countries provides little evidence in favor of the neoclassical predictions. Using the US input-output tables, the paper then turns to industry-level evidence around two major military buildups to shed light on the e¤ects of government spending shocks.

Debt and the Effects of Fiscal Policy

2007

A fiscal shock due to a shift in taxes or in government spending will, at some point in time, constrain the future path of taxes and spending, since the government's intertemporal budget constraint will eventually have to be met. This simple fact is surprisingly overlooked in analyses of the effects of fiscal policy based on vector autoregressive models. We study the effects of fiscal shocks, keeping track of the debt dynamics that arise following a fiscal shock and allowing for the possibility that taxes, spending, and interest rates might respond to the level of the debt as it evolves over time. We show that the absence of a debt feedback effect can result in incorrect estimates of the dynamic effects of fiscal shocks. In particular, omitting an effect of fiscal shocks on long-term interest rates-a frequent finding in studies that omit a debt feedback-can be explained by the misspecification of these fiscal shocks. Using data for the U.S. economy and two alternative identification assumptions, we reconsider the effects of fiscal policy shocks, correcting for these shortcomings. We close the paper by observing that the methodology described by taking into account the stock-flow relationship between debt and fiscal variables to analyze the impact of fiscal shocks could also be applied to other dynamic models that include similar identities. The inclusion of capital as a slow-moving variable in the study of the relationship between productivity shocks and hours worked is one example.

Fiscal Shocks and Their Consequences

2003

This paper is a substantial revision to "Assessing the Effects of Fiscal Shocks" which appeared as NBER working paper no. 7459. We would like to thank Lawrence J. Christiano and Lars Hansen for helpful conversations. In addition we would like to thank several referees for useful comments.

The combination of monetary and fiscal policy shocks : a TVP-FAVAR approach

RePEc: Research Papers in Economics, 2017

This paper analyzes jointly the effects of monetary and fiscal policy shocks in the US economy using a factor augmented vector autoregressive model with drifting coefficients and stochastic volatility. The time varying structure of the model allows to assess the impact of monetary policy shocks in the same periods when fiscal policy shocks identified via the narrative approach are also at play. In this way we study how the monetary policy transmission changes conditional on expansionary or contractionary exogenous fiscal policies, which are determined by the discretionary intervention of the fiscal authority and are not the response of business cycle fluctuations or the reaction to monetary policy. We find that fiscal policy strongly affects the impulse responses to monetary policy shocks through the aggregate demand channel. These results are relevant to understand the implications of different policy mixes.

Asymmetric Fiscal Policy Shocks

We empirically test the effects of unanticipated fiscal policy shocks on the growth rate and the cyclical component of real private output and reveal different types of asymmetries in fiscal policy implementation. The data used are quarterly U.S. observations over the period 1967:1 to 2011:4. In doing so, we use both a vector autoregressive and the novel support vector machines systems in order to extract the fiscal policy shocks series. The latter has never been used before in a similar macroeconomic setting. Within our research framework, in order to test the robustness of our results to alternative aggregate money supply definitions we use two differnet monetary aggregates. From each of these four systems we extracted four types of shocks: a negative and a positive government spending shock and a negative and a positive government revenue shock. These eight different types of unanticipated fiscal policy shocks are next used to empirically examine their effects on the growth rate and the cyclical component of real private GNP in two sets of regressions: one that assumes only contemporaneous effects of the shocks on output and one that is augmented with four lags of each fiscal shock.

Fiscal policy and aggregate demand in the USA before, during, and following the Great Recession

International Tax and Public Finance, 2018

We examine the effect of federal and subnational fiscal policy on aggregate demand in the U.S. by introducing the fiscal effect (FE) measure. FE can be decomposed into three components. Discretionary FE quantifies the effect of discretionary or legislated policy changes on aggregate demand. Cyclical FE captures the effect of the automatic stabilizers-changes in government taxes and spending arising from the business cycle. Residual FE measures the effect of all changes in government revenues and outlays which cannot be categorized as either discretionary or cyclical; for example, it captures the effect of the secular increase in entitlement program spending due to the aging of the population. We use FE to examine the contribution of fiscal policy to growth in real GDP over the course of the Great Recession and current expansion. We compare this contribution to the contributions to growth in aggregate demand made by fiscal policy over past business cycles. In doing so, we highlight that the relatively strong support of government policy to GDP growth during the Great Recession was followed by a historically weak contribution over the course of the current expansion. NOTE: The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References to this publications should be cleared with the author(s) given its preliminary status.

Fiscal Policy and Aggregate Demand in the U.S. Before, During and Following the Great Recession

Finance and Economics Discussion Series, 2017

What are the effects of fiscal policy shocks? (original) (raw)

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