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Fiscal Foresight and the Effects of Government Spending

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  • Mario Forni

    ()

  • Luca Gambetti

    ()

Abstract

We study the effects of government spending by using a structural, large dimensional, dynamic factor model. We find that the government spending shock is non-fundamental for the variables commonly used in the structural VAR literature, so that its impulse response functions cannot be consistently estimated by means of a VAR. Government spending raises both consumption and investment, with no evidence of crowding out. The impact multiplier is 1.7 and the long run multiplier is 0.6.

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Bibliographic Info

Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 851.10.

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Length: 34
Date of creation: 06 May 2010
Date of revision:
Handle: RePEc:aub:autbar:851.10

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Keywords: structural factor model; sign restrictions; fiscal policy; government spending shock; fundamentalness; non-fundamentalness.;

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