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Price Dispersions in Monetary Unions: The Role of Fiscal Shocks

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Author Info
Canova, Fabio
Pappa, Evi

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Abstract

We study the effect of regional expenditure and revenue shocks on price dispersion in a monetary union using annual US state and quarterly EU data. We identify fiscal shocks using sign restrictions on the dynamics of expenditures, revenues, deficits and output. We construct two estimates for structural price dispersion dynamics, one for the average and one for each unit, which optimally weight the information contained in the data for all units. We find that fiscal shocks explain between 10-20% of the variability of price dispersion in the US and between 3-4% in the EU. On average, the predictions of standard theory are confirmed: expansionary fiscal disturbances produce positive price dispersion responses in both areas while distortionary balance budget shocks produce negative price responses. In about one third of the units, negative price dispersion responses to expansionary fiscal shocks are observed. Further, heterogeneities in shapes and peak responses are observed. Explanations for the puzzling features are provided.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3746.

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Date of creation: Feb 2003
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Handle: RePEc:cpr:ceprdp:3746

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Keywords: bayesian techniques; fiscal policy; price dispersions; supply effects;

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Find related papers by JEL classification:
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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  3. Fatas, Antonio & Mihov, Ilian, 2001. "Government size and automatic stabilizers: international and intranational evidence," Journal of International Economics, Elsevier, vol. 55(1), pages 3-28, October. [Downloadable!] (restricted)
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  4. Wendy Edelberg & Martin Eichenbaum & Jonas D.M. Fisher, 1999. "Understanding the Effects of a Shock to Government Purchases," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 166-206, January. [Downloadable!] (restricted)
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  5. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Ramey, Valerie A. & Shapiro, Matthew D., 1998. "Costly capital reallocation and the effects of government spending," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 145-194, June. [Downloadable!] (restricted)
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  7. S. Rao Aiyagari & Lawrence J. Christiano & Martin Eichenbaum, 1990. "The output, employment, and interest rate effects of government consumption," Working Paper Series, Macroeconomic Issues 90-10, Federal Reserve Bank of Chicago.
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  8. Timothy Besley & Anne Case, 1993. "Does Electoral Accountability Affect Economic Policy Choices? Evidence from Gubernatorial Term Limits," NBER Working Papers 4575, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November. [Downloadable!] (restricted)
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  10. Margarida Duarte & Alexander L. Wolman, 2002. "Regional inflation in a currency union: fiscal policy vs. fundamentals," International Finance Discussion Papers 746, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  11. Giavazzi, Francesco & Pagano, Marco, 1995. "Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience," CEPR Discussion Papers 1284, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  1. Roberto Perotti, 2007. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Working Papers 13143, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. jerome henry & sandro momigliano & pablo hernandez de cos, 2005. "The short-term impact of government budgets on prices Evidence from macroeconometric models," Macroeconomics 0501020, EconWPA. [Downloadable!]
    Other versions:
  3. António Afonso & Peter Claeys, 2006. "The dynamic behaviour of budget components and output – the cases of France, Germany, Portugal, and Spain," Working Papers 2006/26, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
  4. Peter Bofinger & Eric Mayer, 2004. "Monetary and Fiscal Policy Interaction in the Euro Area with different assumptions on the Phillips curve," cege – Center for European, Governance and Economic Development Research Discussion Papers 27, cege – Center for European, Governance and Economic Development Research, University of Goettingen (Germany).. [Downloadable!]
  5. Jérôme Henry & Pablo Hernández de Cos & Sandro Momigliano, 2004. "The short-term impact of government budgets on prices: evidence from macroeconomic models," Working Paper Series 396, European Central Bank. [Downloadable!]
  6. Hess Chung & Eric Leeper, 2007. "What Has Financed Government Debt?," Caepr Working Papers 2007-015, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington. [Downloadable!]
    Other versions:
  7. Fabio Canova & Matteo Ciccarelli, 2006. "Estimating multi-country VAR models," Working Paper Series 603, European Central Bank. [Downloadable!]
    Other versions:
  8. Philip R. Lane & Patrick Honohan, 2003. "Divergent Inflation Rates in EMU," Trinity Economics Papers 20034, Trinity College Dublin, Department of Economics. [Downloadable!]
    Other versions:
  9. Massimo Giuliodori & Roel Beetsma, 2004. "What are the spill-overs from fiscal shocks in Europe? An empirical analysis," Working Paper Series 325, European Central Bank. [Downloadable!]
  10. Massimo Giuliodori & Roel Beetsma, 2005. "What are the Trade Spill-Overs from Fiscal Shocks in Europe? An Empirical Analysis**," De Economist, Springer, vol. 153(2), pages 167-197, 06. [Downloadable!] (restricted)
  11. Roel Beetsma & Massimo Giuliodori & Franc Klaassen, 2005. "Trade Spillovers of Fiscal Policy in the European Union: A Panel Analysis," DNB Working Papers 052, Netherlands Central Bank, Research Department. [Downloadable!]
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  12. Jerome Creel & Paola Monperrus-Veroni & Francesco Saraceno, 2005. "Discretionary Policy Interactions and the Fiscal Theory of the Price Level: A SVAR Analysis on French Data," Documents de Travail de l'OFCE 2005-12, Observatoire Francais des Conjonctures Economiques (OFCE). [Downloadable!]
  13. Margarida Duarte & Alexander L. Wolman, 2003. "Fiscal policy and regional inflation in a currency union," Working Paper 03-11, Federal Reserve Bank of Richmond. [Downloadable!]
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  14. Marcelo Sánchez, 2009. "National prices and wage setting in a currency union," Working Paper Series 1058, European Central Bank. [Downloadable!]
  15. Artis, Michael J & Onorante, Luca, 2006. "The Economic Importance of Fiscal Rules," CEPR Discussion Papers 5684, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  16. Peter Bofinger & Eric Mayer, 2007. "Monetary and Fiscal Policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve," Open Economies Review, Springer, vol. 18(3), pages 291-305, July. [Downloadable!] (restricted)
  17. Dario Caldara & Christophe Kamps, 2006. "What Do We Know About the Effects of Fiscal Policy Shocks? A Comparative Analysis," Computing in Economics and Finance 2006 257, Society for Computational Economics. [Downloadable!]
  18. Fabio Canova & Evi Pappa, 2005. "The elusive costs and the immaterial gains of fiscal contraints," Economics Working Papers 928, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
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