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Fiscal Foresight and the Effects of Goverment Spending

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  • Forni, Mario
  • Gambetti, Luca

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.

Suggested Citation

  • Forni, Mario & Gambetti, Luca, 2010. "Fiscal Foresight and the Effects of Goverment Spending," CEPR Discussion Papers 7840, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7840
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    More about this item

    Keywords

    Fiscal policy; Fundamentalness; Government spending shock; Non-fundamentalness; Sign restrictions; Structural factor model;
    All these keywords.

    JEL classification:

    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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