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How does the U.S. government finance fiscal shocks?

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  • Antje Berndt
  • Hanno Lustig
  • Sevin Yeltekin

Abstract

We develop a method for identifying and quantifying the fiscal channels that help finance government spending shocks. We define fiscal shocks as surprises in defense spending and show that they are more precisely identified when defense stock data are used in addition to aggregate macroeconomic data. Our results show that in the postwar period, about 9% of the U.S. government’s unantic- ipated spending needs were financed by a reduction in the market value of debt and more than 70% by an increase in primary sur- pluses. Additionally, we find that long-term debt is more effective at absorbing fiscal risk than short-term debt.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2006-E70.

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Handle: RePEc:cmu:gsiawp:1153249048

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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

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Web: http://student-3k.tepper.cmu.edu/gsiadoc/GSIA_WP.asp

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  1. Isabel Correia & Juan Pablo Nicolini & Pedro Teles, 2002. "Optimal fiscal and monetary policy: equivalence results," Working Paper Series WP-02-16, Federal Reserve Bank of Chicago.
  2. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," NBER Working Papers 5031, National Bureau of Economic Research, Inc.
  3. JonasD.M. Fisher & Ryan Peters, 2010. "Using Stock Returns to Identify Government Spending Shocks," Economic Journal, Royal Economic Society, vol. 120(544), pages 414-436, 05.
  4. Christopher Sleet, 2004. "Optimal Taxation with Private Government Information," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1217-1239.
  5. George-Marios Angeletos, 2002. "Fiscal Policy With Noncontingent Debt And The Optimal Maturity Structure," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1105-1131, August.
  6. Christopher Sleet, 2004. "Optimal Taxation with Private Government Information," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 1217-1239, October.
  7. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  8. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
  9. Hess Chung & Eric M. Leeper, 2007. "What Has Financed Government Debt?," NBER Working Papers 13425, National Bureau of Economic Research, Inc.
  10. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
  11. David S. Bizer & Steven N. Durlauf, 1990. "Testing the Positive Theory of Government Finance," NBER Working Papers 3349, National Bureau of Economic Research, Inc.
  12. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
  13. Campbell, John Y, 1993. "Intertemporal Asset Pricing without Consumption Data," American Economic Review, American Economic Association, vol. 83(3), pages 487-512, June.
  14. Hess, Gregory D, 1993. "A Test of the Theory of Optimal Taxation for the United States, 1869-1989," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 712-16, November.
  15. 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.
  16. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
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Cited by:
  1. George J. Hall & Thomas J. Sargent, 2010. "Interest rate risk and other determinants of post WWII U.S. government debt/GDP dynamics," Working Papers 01, Brandeis University, Department of Economics and International Businesss School.
  2. Cochrane, John H., 2011. "Understanding policy in the great recession: Some unpleasant fiscal arithmetic," European Economic Review, Elsevier, vol. 55(1), pages 2-30, January.

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