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An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output

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  • Olivier Blanchard
  • Roberto Perotti

Abstract

This paper characterizes the dynamic effects of shocks in government spending and taxes on economic activity in the United States in the post-war period. It does so by using a mixed structural VAR/event study approach. Identification is achieved by using institutional information about the tax and transfer systems and the timing of tax collections to identify the automatic response of taxes and spending to activity, and, by implication, to infer fiscal shocks. The results consistently show positive government spending shocks as having a positive effect on output, and positive tax shocks as having a negative effect. The multipliers for both spending and tax shocks are typically small. Turning to the effects of taxes and spending on the components of GDP, one of the results has a distinctly non-standard flavor: Both increases in taxes and increases in government spending have a strong negative effect on investment spending.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7269.

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Date of creation: Jul 1999
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Publication status: published as Blanchard, Olivier and Robert Perotti. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," Quarterly Journal of Economics, 2002, v107(4,Nov), 1329-1368.
Handle: RePEc:nbr:nberwo:7269

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  1. Barro, Robert J, 1981. "Output Effects of Government Purchases," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(6), pages 1086-1121, December.
  2. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring monetary policy," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 95-09, Federal Reserve Bank of San Francisco.
  3. Ramey, Valerie A. & Shapiro, Matthew D., 1998. "Costly capital reallocation and the effects of government spending," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 48(1), pages 145-194, June.
  4. James D. Hamilton & Marjorie A. Flavin, 1985. "On the Limitations of Government Borrowing: A Framework for Empirical Testing," NBER Working Papers 1632, National Bureau of Economic Research, Inc.
  5. Bohn, H., 1991. "Budget Balance Through Revenue or Spending Adjustments? Some Historical Evidence for the United States," Weiss Center Working Papers, Wharton School - Weiss Center for International Financial Research 3-91, Wharton School - Weiss Center for International Financial Research.
  6. King, R.G. & Baxter, M., 1990. "Fiscal Policy In General Equilibrium," RCER Working Papers 244, University of Rochester - Center for Economic Research (RCER).
  7. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD Publishing.
  8. Gordon, David B & Leeper, Eric M, 1994. "The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 102(6), pages 1228-47, December.
  9. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
  10. Wendy Edelberg & Martin Eichenbaum & Jonas D.M. Fisher, 1999. "Understanding the Effects of a Shock to Government Purchases," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 166-206, January.
  11. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
  12. Christopher A. Sims & Tao A. Zha, 1998. "Does monetary policy generate recessions?," Working Paper, Federal Reserve Bank of Atlanta 98-12, Federal Reserve Bank of Atlanta.
  13. Blinder, Alan S, 1981. "Temporary Income Taxes and Consumer Spending," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(1), pages 26-53, February.
  14. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(3), pages 949-963, August.
  15. Schiantarelli, Fabio & Perotti, Roberto & Ardagna, Silvia & Alesina, Alberto, 2002. "Fiscal Policy, Profits, and Investment," Scholarly Articles 4685103, Harvard University Department of Economics.
  16. Ahmed, S. & Rogers, J.H., 1993. "Government Budget Deficits and Trade Deficits: Are Present Value Constraints Satisfied in Long-Term Data?," Papers, Pennsylvania State - Department of Economics 5-93-6, Pennsylvania State - Department of Economics.
  17. Poterba, James M, 1988. "Are Consumers Forward Looking? Evidence from Fiscal Experiments," American Economic Review, American Economic Association, American Economic Association, vol. 78(2), pages 413-18, May.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Why the Stimulus Tanked: Untimely, Untargeted, Untemporary
    by Nick Gillespie in Hit & Run blog on 2011-10-06 17:25:00
  2. Do Taxes Affect Economic Growth?
    by Matt Mitchell in Neighborhood Effects on 2012-09-21 20:59:33
  3. Links zur Serie „Revolution in der Ökonomie”
    by Martin Kaelble in Wirtschaftswunder on 2009-05-12 12:00:00
  4. Fiscal stimulus
    by James Hamilton in Econbrowser on 2012-05-20 07:01:57
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