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A New Measure of Fiscal Shocks Based on Budget Forecasts and its Implications

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  • Manuel Coutinho Pereira

Abstract

This paper develops a new measure of US fiscal policy shocks that intends to avoid the anticipation problem affecting conventional measures, being also arguably free from endogeneity. The shocks are intended to capture changes to the component of anticipated fiscal policy that is exogenous to economic developments. Key economic variables such as output and interest rates respond quickly and significantly to a realization of the estimated shock and, in the first part of the sample, 1969-1988, in a way consistent with the Keynesian prior. In contrast, over the period 1989-2008 the effects are at odds with that prior, with fiscal loosening producing contractionary impacts.

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File URL: http://www.bportugal.pt/en-US/BdP%20Publications%20Research/WP200921.pdf
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Bibliographic Info

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200921.

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Date of creation: 2009
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Handle: RePEc:ptu:wpaper:w200921

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  1. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
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  16. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2008. "Fiscal Foresight: Analytics and Econometrics," Caepr Working Papers 2008-013, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
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Cited by:
  1. Manuel Coutinho Pereira, 2012. "Revisiting the effectiveness of monetary and fiscal policy in the US, measured on the basis of structural VARs," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.

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