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On the Size of Fiscal Multipliers: A Counterfactual Analysis

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  • Jan Kuckuck

    ()
    (Universitaet Osnabrueck)

  • Frank Westermann

    ()
    (Universitaet Osnabrueck)

Abstract

The Structural Vector Auto-regression (SVAR) approach to estimating fiscal multipliers, following the seminal paper by Blanchard and Perotti (2002), has been widely applied in the literature. In our paper we discuss the interpretation of these estimates and suggest that they are more useful for forecasting purposes than for policy advice. Our key point is that policy instruments often react to each other. We analyze a data set from the US and document that these interactions are economically and statistically significant. Increases in spending have been financed by subsequent increases in taxes. Increases in taxes have been complemented by additional spending cuts in subsequent quarters. In a counterfactual analysis we report fiscal multipliers that abstract from these dynamic responses of policy instruments to each other.

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Bibliographic Info

Paper provided by Institute of Empirical Economic Research in its series Working Papers with number 96.

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Length: 12
Date of creation: 28 Jun 2013
Date of revision:
Handle: RePEc:iee:wpaper:wp0096

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Keywords: Fiscal policy; government spending; net revenues; structural vector autoregression;

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  1. John Cogan & Tobias Cwik & John Taylor & Volker Wieland, 2009. "New Keynesian Versus Old Keynesian Government Spending Multipliers," Discussion Papers 08-030, Stanford Institute for Economic Policy Research.
  2. Andrew Mountford & Harald Uhlig, 2009. "What are the effects of fiscal policy shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 960-992.
  3. Favero, Carlo A. & Giavazzi, Francesco & Perego, Jacopo, 2011. "Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy," CEPR Discussion Papers 8517, C.E.P.R. Discussion Papers.
  4. Ethan Ilzetzki & Enrique G. Mendoza & Carlos A. Végh, 2010. "How Big (Small?) are Fiscal Multipliers?," NBER Working Papers 16479, National Bureau of Economic Research, Inc.
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  7. Olivier J. Blanchard & Daniel Leigh, 2013. "Growth Forecast Errors and Fiscal Multipliers," NBER Working Papers 18779, National Bureau of Economic Research, Inc.
  8. Roberto Perotti, 2004. "Estimating the effects of fiscal policy in OECD countries," Working Papers 276, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  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.
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  14. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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  16. 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.
  17. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-85, September.
  18. Ramey, Valerie, 1993. "How important is the credit channel in the transmission of monetary policy?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 1-45, December.
  19. Jonathan A. Parker, 2011. "On Measuring the Effects of Fiscal Policy in Recessions," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 703-18, September.
  20. Perotti, Roberto, 2005. "Estimating the Effects of Fiscal Policy in OECD Countries," CEPR Discussion Papers 4842, C.E.P.R. Discussion Papers.
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