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Measuring the Impact of Fiscal Policy in the Face of Anticipation: A Structural VAR Approach

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  • Karel Mertens
  • MortenO. Ravn

Abstract

Empirical estimates of the impact of government spending shocks disagree on central issues such as the size of output multipliers and the responses of consumption and the real wage. One explanation for the disagreement is that fiscal shocks are often anticipated. Due to misspecification of the information set, anticipation effects may invalidate SVAR estimates of impulse responses. We use economic theory to derive a fiscal SVAR estimator that is applicable when fiscal shocks are anticipated. We study its properties and apply it to US data. We fail to find evidence that anticipation effects overturn the existing findings from the fiscal SVAR literature. Copyright � The Author(s). Journal compilation � Royal Economic Society 2010.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 120 (2010)
Issue (Month): 544 (05)
Pages: 393-413

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Handle: RePEc:ecj:econjl:v:120:y:2010:i:544:p:393-413

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  1. Stephanie Schmitt-Grohe & Martin Uribe, 2008. "What's News in Business Cycles," NBER Working Papers 14215, National Bureau of Economic Research, Inc.
  2. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2011. "Monetary Policy and Stock Market Booms," Working Papers 2011-005, Banco Central de Reserva del Perú.
  3. Karel Mertens & Morten O. Ravn, 2012. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated US Tax Policy Shocks," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 145-81, May.
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  5. Giannone, Domenico & Reichlin, Lucrezia, 2006. "Does information help recovering structural shocks from past observations?," Working Paper Series 0632, European Central Bank.
  6. Andrew Mountford & Harald Uhlig, 2005. "What are the Effects of Fiscal Policy Shocks?," SFB 649 Discussion Papers SFB649DP2005-039, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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  9. Corsetti, Giancarlo & Meier, André & Müller, Gernot, 2009. "Fiscal Stimulus with spending reversals," CEPR Discussion Papers 7302, C.E.P.R. Discussion Papers.
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