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State-dependent effects of fiscal policy

Author

Listed:
  • Fazzari Steven M.

    (Department of Economics, Washington University in St. Louis, St. Louis, MO 63130, USA)

  • Morley James

    (School of Economics, University of New South Wales, Business School, Sydney, NSW 2052, Australia)

  • Panovska Irina

    (Department of Economics, Lehigh University, 621 Taylor Street, Rauch Business Center, Bethlehem, PA 18015, USA)

Abstract

We investigate the effects of government spending on US output with a threshold structural vector autoregressive model. We consider Bayesian model comparison and generalized impulse response analysis to test for nonlinearities in the responses of output to government spending. Our empirical findings support state-dependent effects of fiscal policy, with the government spending multiplier larger and more persistent whenever there is considerable economic slack. Based on capacity utilization as the preferred threshold variable, the estimated multiplier is large (1.6) for a low-utilization regime that accounts for more than half of the sample observations from 1967 to 2012 according to the estimated threshold level.

Suggested Citation

  • Fazzari Steven M. & Morley James & Panovska Irina, 2015. "State-dependent effects of fiscal policy," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 19(3), pages 285-315, June.
    • Handle: RePEc:bpj:sndecm:v:19:y:2015:i:3:p:285-315:n:5
    DOI: 10.1515/snde-2014-0022
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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