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A primer on the empirical identification of government spending shocks

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  • Kristie M. Engemann
  • Michael T. Owyang
  • Sarah Zubairy

Abstract

The empirical literature on the effects of government spending shocks lacks unanimity about the responses of consumption and wages. Proponents of shocks identified by structural vector auto-regressions (VARs) find results consistent with New Keynesian models: consumption and wages increase. On the other hand, proponents of the narrative approach find results consistent with neoclassical models: consumption and wages decrease. This paper reviews these two identifications and confirms their differences by using standard economic series. It also uses alternative measures of government spending, output, and the labor market and shows that, although there are minor fluctuations within each identification, the disparate results between the two are robust to the alternative measures. However, under the structural VAR approach, the authors find some differences between the responses to federal and state/local government spending.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2008)
Issue (Month): Mar ()
Pages: 117-132

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Handle: RePEc:fip:fedlrv:y:2008:i:mar:p:117-132:n:v.90no.2

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Keywords: Government spending policy ; Expenditures; Public;

References

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  1. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
  2. Carlo Favero & Francesco Giavazzi, 2007. "Debt and the effects of fiscal policy," Working Papers, Federal Reserve Bank of Boston 07-4, Federal Reserve Bank of Boston.
  3. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  4. Pappa, Evi, 2005. "New-Keynesian or RBC Transmission? The Effects of Fiscal Shocks in Labour Markets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5313, C.E.P.R. Discussion Papers.
  5. Morten O. Ravn & Stephanie Schmitt-Grohe, 2004. "Deep Habits," 2004 Meeting Papers, Society for Economic Dynamics 208, Society for Economic Dynamics.
  6. Roberto Perotti, 2008. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 169-226 National Bureau of Economic Research, Inc.
  7. Fatás, Antonio & Mihov, Ilian, 2001. "The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2760, C.E.P.R. Discussion Papers.
  8. Wendy Edelberg & Martin Eichenbaum & Jonas D.M. Fisher, 1998. "Understanding the effects of a shock to government purchases," Working Paper Series, Federal Reserve Bank of Chicago WP-98-7, Federal Reserve Bank of Chicago.
  9. Valerie A. Ramey & Matthew D. Shapiro, 1999. "Costly Capital Reallocation and the Effects of Government Spending," NBER Working Papers 6283, National Bureau of Economic Research, Inc.
  10. Andrew Mountford & Harald Uhlig, 2009. "What are the effects of fiscal policy shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 24(6), pages 960-992.
  11. Martin Eichenbaum & Jonas Fisher, 2004. "Fiscal Policy in the Aftermath of 9/11," NBER Working Papers 10430, National Bureau of Economic Research, Inc.
  12. Lei Fang & Richard Rogerson, 2009. "Policy Analysis In A Matching Model With Intensive And Extensive Margins," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1153-1168, November.
  13. Faust, Jon, 1998. "The robustness of identified VAR conclusions about money," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 49(1), pages 207-244, December.
  14. Roberto Perotti, 2004. "Estimating the effects of fiscal policy in OECD countries," Working Papers 276, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  15. Burnside, Craig & Eichenbaum, Martin & Fisher, Jonas D. M., 2004. "Fiscal shocks and their consequences," Journal of Economic Theory, Elsevier, Elsevier, vol. 115(1), pages 89-117, March.
  16. Paustian Matthias, 2007. "Assessing Sign Restrictions," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 7(1), pages 1-33, August.
  17. Jon Faust, 1998. "The robustness of identified VAR conclusions about money," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 610, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. Anderson, Emily & Inoue, Atsushi & Rossi, Barbara, 2013. "Heterogeneous Consumers and Fiscal Policy Shocks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9631, C.E.P.R. Discussion Papers.
  2. Gerald Carlino & Robert P. Inman, 2013. "Macro Fiscal Policy in Economic Unions: States as Agents," NBER Working Papers 19559, National Bureau of Economic Research, Inc.
  3. Weonho Yang & Jan Fidrmuc & Sugata Ghosh, 2012. "Macroeconomic Effects of Government Spending Shocks: New Evidence Using Natural Distaster Relief in Korea," CEDI Discussion Paper Series, Centre for Economic Development and Institutions(CEDI), Brunel University 12-05, Centre for Economic Development and Institutions(CEDI), Brunel University.
  4. Owyang, Michael T. & Zubairy, Sarah, 2013. "Who benefits from increased government spending? A state-level analysis," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 43(3), pages 445-464.
  5. Craig, Steven G. & Hoang, Edward C., 2011. "State government response to income fluctuations: Consumption, insurance, and capital expenditures," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 41(4), pages 343-351, July.

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