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Fiscal Foresight, Limited Information and the Effects of Government Spending Shocks

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  • Matteo Fragetta

    ()
    (University of Salerno, Department of Economics and Statistics)

  • Emanuel Gasteiger

    ()
    (ISCTE-IUL, Business School, Department of Economics and BRU-IUL)

Abstract

We quantify the impact of government spending shocks in the US. Thereby, we control for fiscal foresight by utilizing the narrative approach. Moreover, we surmount the generic limited information problem inherent in vector autoregressions (VARs) by a factor-augmented VAR (FAVAR) approach. We find that a positive deficit-financed defense shock raises output by more than in a VAR (e.g. 2.61 vs. 2.04 for peak multipliers). Furthermore, our evidence suggests that consumption is crowded in. These results are robust to different variants of controlling for fiscal foresight and reveal the crucial role of the limited information problem in fiscal VARs.

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File URL: http://bru-unide.iscte.pt/RePEc/pdfs/12-02.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by ISCTE-IUL, Business Research Unit (BRU-IUL) in its series Working Papers Series 2 with number 12-02.

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Length: 40 pages
Date of creation: 15 Jun 2012
Date of revision:
Handle: RePEc:isc:iscwp2:bruwp1202

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Web page: http://bru-unide.iscte.pt/
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Keywords: FAVAR; Fiscal Foresight; Limited Information; Fiscal Policy; Government Spending; Consumption;

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  1. Carlo A. Favero & Francesco Giavazzi, 2010. "Reconciling VAR-based and Narrative Measures of the Tax-Multiplier," Working Papers 361, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Koop, Gary & Korobilis, Dimitris, 2009. "Bayesian Multivariate Time Series Methods for Empirical Macroeconomics," MPRA Paper 20125, University Library of Munich, Germany.
  3. Karel Mertens & MortenO. Ravn, 2010. "Measuring the Impact of Fiscal Policy in the Face of Anticipation: A Structural VAR Approach," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 120(544), pages 393-413, 05.
  4. Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 979, Cowles Foundation for Research in Economics, Yale University.
  5. James D. Hamilton, 1985. "Historical Causes of Postwar Oil Shocks and Recessions," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 1), pages 97-116.
  6. Craig Burnside & Martin Eichenbaum & Jonas Fisher, 2003. "Fiscal Shocks and Their Consequences," NBER Working Papers 9772, National Bureau of Economic Research, Inc.
  7. Mario Forni & Luca Gambetti, 2010. "Fiscal Foresight and the Effects of Government Spending," Working Papers 460, Barcelona Graduate School of Economics.
  8. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2009. "Fiscal Foresight and Information Flows," NBER Working Papers 14630, National Bureau of Economic Research, Inc.
  9. Bai, Jushan & Ng, Serena, 2007. "Determining the Number of Primitive Shocks in Factor Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 25, pages 52-60, January.
  10. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Econometric Society World Congress 2000 Contributed Papers 1504, Econometric Society.
  11. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
  12. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, American Economic Association, vol. 4(2), pages 1-27, May.
  13. Matteo Fragetta & Giovanni Melina, 2011. "The Effects Of Fiscal Policy Shocks In Svar Models: A Graphical Modelling Approach," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(4), pages 537-566, 09.
  14. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-85, September.
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