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Government Spending Shocks and the Multiplier: New Evidence from the U.S. Based on Natural Disasters

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  • Weonho Yang
  • Jan Fidrmuc
  • Sugata Ghosh

Abstract

The literature on estimating macroeconomic effects of fiscal policy requires suitable instruments to identify exogenous and unanticipated spending shocks. So far, the instrument of choice has been military build-ups. This instrument, however, largely limits the analysis to the US as few other countries have been involved in mainly extraterritorial conflicts. Moreover, the expenditure associated with military build-ups affects primarily the defense sector so that the resulting multiplier does not necessarily approximate the effects of changes to general government spending. We propose an alternative instrument: government relief expenditure in the wake of natural disasters which is more similar in its scope to general government spending. We construct a rich data set of natural disasters and the corresponding government responses at the US state level. We apply this methodology both at the state as well as national levels and show that natural disasters serve as a powerful instrument for identifying government spending shocks. Furthermore, we show that the multiplier pertaining to non-defense government spending is higher than the defense-spending multiplier estimated in the literature using military build-ups.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4005.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_4005

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Related research

Keywords: fiscal shocks; narrative approach; fiscal multiplier; natural disaster;

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References

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  1. Melecky, Martin & Raddatz, Claudio, 2011. "How do governments respond after catastrophes ? natural-disaster shocks and the fiscal stance," Policy Research Working Paper Series 5564, The World Bank.
  2. Noy, Ilan, 2009. "The macroeconomic consequences of disasters," Journal of Development Economics, Elsevier, vol. 88(2), pages 221-231, March.
  3. Benetrix, Agustin & Lane, Philip R., 2009. "The Impact of Fiscal Shocks on the Irish Economy," The Economic and Social Review, Economic and Social Studies, vol. 40(4), pages 407-434.
  4. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-85, September.
  5. Raffaela Giordano & Sandro Momigliano & Stefano Neri & Roberto Perotti, 2008. "The effetcs of fiscal policy in Italy: Evidence from a VAR model," Temi di discussione (Economic working papers) 656, Bank of Italy, Economic Research and International Relations Area.
  6. Craig Burnside & Martin Eichenbaum & Jonas Fisher, 2003. "Fiscal Shocks and Their Consequences," NBER Working Papers 9772, National Bureau of Economic Research, Inc.
  7. Raddatz, Claudio, 2007. "Are external shocks responsible for the instability of output in low-income countries?," Journal of Development Economics, Elsevier, vol. 84(1), pages 155-187, September.
  8. Crespo Cuaresma & Hlouskova & Obersteiner, 2008. "Natural Disasters As Creative Destruction? Evidence From Developing Countries," Economic Inquiry, Western Economic Association International, vol. 46(2), pages 214-226, 04.
  9. 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.
  10. Loayza, Norman V. & Olaberría, Eduardo & Rigolini, Jamele & Christiaensen, Luc, 2012. "Natural Disasters and Growth: Going Beyond the Averages," World Development, Elsevier, vol. 40(7), pages 1317-1336.
  11. Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(2), pages 190-210, May.
  12. Mark Skidmore & Hideki Toya, 2002. "Do Natural Disasters Promote Long-Run Growth?," Economic Inquiry, Western Economic Association International, vol. 40(4), pages 664-687, October.
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