Fiscal Foresight, Limited Information and the Effects of Government Spending Shocks
AbstractWe 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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Bibliographic InfoPaper provided by ISCTE-IUL, Business Research Unit (BRU-IUL) in its series Working Papers Series 2 with number 12-02.
Length: 40 pages
Date of creation: 15 Jun 2012
Date of revision:
FAVAR; Fiscal Foresight; Limited Information; Fiscal Policy; Government Spending; Consumption;
Find related papers by 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
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- 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
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
- H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-08-23 (All new papers)
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