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Fiscal Policy And Economic Activity: Us Evidence

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  • K. Peren Arin

    ()

  • Faik Koray

Abstract

We investigate the dynamic effects of five different fiscal shocks on the US economy using a structural vector autoregressive (SVAR) model that uses Blanchard-Quah type restrictions. We find that an increase in indirect taxes or in corporate taxes has a contractionary effect on the economy, while an increase in personal taxes in neither contractionary, nor expansionary. These results imply that the Ricardian Equivalance hypothesis holds only for personal taxes. On the spending side, we find that an increase in government wages and salaries has a contractionary effect on the economy, while an increase in defense spending is expansionary. Our results suggest that different fiscal shocks have different and offsetting effects on the economy, and using aggregated data may, therefore, conceal the effects of fiscal policy.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2005-09.

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Length: 29 pages
Date of creation: Apr 2005
Date of revision:
Handle: RePEc:een:camaaa:2005-09

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  1. Roberto Perotti, 2005. "Estimating the effects of fiscal policy in OECD countries," Proceedings, Federal Reserve Bank of San Francisco.
  2. Ahmed, Shaghil & Yoo, Byung Sam, 1995. "Fiscal Trends in Real Economic Aggregates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 985-1001, November.
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  8. Alesina, Alberto F & Ardagna, Silvia & Perotti, Roberto & Schiantarelli, Fabio, 1999. "Fiscal Policy, Profits and Investment," CEPR Discussion Papers 2250, C.E.P.R. Discussion Papers.
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  13. Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
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Citations

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Cited by:
  1. Weshah Razzak, 2007. "Explaining the gaps in labour productivity in some developed countries," Money Macro and Finance (MMF) Research Group Conference 2006 30, Money Macro and Finance Research Group.
  2. Arin, K. Peren & Mamun, Abdullah & Purushothman, Nanda, 2009. "The effects of tax policy on financial markets: G3 evidence," Review of Financial Economics, Elsevier, vol. 18(1), pages 33-46, January.
  3. Razzak, Weshah, 2006. "Explaining the gaps in labour productivity for some developed countries," MPRA Paper 53, University Library of Munich, Germany.
  4. James Feyrer & Jay Shambaugh, 2012. "Global Savings and Global Investment: The Transmission of Identified Fiscal Shocks," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 95-114, May.

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