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Local Projections in Unstable Environments: How Effective is Fiscal Policy?

Author

Listed:
  • Rossi, Barbara
  • Inoue, Atsushi
  • Wang, Yiru

Abstract

The paper develops a local projection estimator for estimating impulse responses in the presence of time variation. Importantly, we allow local instabilities in both slope coefficients and variances. Monte Carlo simulations illustrate that the method performs well in practice. Using our proposed estimator, we shed new light on the effects of fiscal policy shocks and the size of government spending multipliers. Our analysis uncovers the existence of instabilities that were unaccounted for in previous studies, and links time variation in the multipliers to the size of government debt.

Suggested Citation

  • Rossi, Barbara & Inoue, Atsushi & Wang, Yiru, 2022. "Local Projections in Unstable Environments: How Effective is Fiscal Policy?," CEPR Discussion Papers 17134, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17134
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    More about this item

    Keywords

    Time variation; Local projections; Instability; Path estimator; Weighted average risk; Fiscal policy; Fiscal multiplier; Monetary policy; Government spending;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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