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Fiscal Policy and Economic Activity: U.S. Evidence

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Author Info
K Peren Arin (Massey University, Department of Commerce)
Faik Koray (Louisiana State University)

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Abstract

We investigate the dynamic effects of five different fiscal shocks on the US economy using a structural vector autoregressive (SVAR) model that uses Blanchard-Quah type restrictions. We find that an increase in indirect taxes or in corporate taxes has a contractionary effect on the economy, while an increase in personal taxes is neither contractionary, nor expansionary. These results imply that the Ricardian Equivalence hypothesis holds only for personal taxes. On the spending side, we find that an increase in government wages and salaries has a contractionary effect on the economy, while an increase in defense spending is expansionary. Our results suggest that different fiscal shocks have different and offsetting effects on the economy, and using aggregated data may, therefore, conceal the effects of fiscal policy.

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Paper provided by EconWPA in its series Macroeconomics with number 0508024.

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Date of creation: 22 Aug 2005
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Handle: RePEc:wpa:wuwpma:0508024

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Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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  1. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Ardagna, Silvia, 2001. " Fiscal Policy Composition, Public Debt, and Economic Activity," Public Choice, Springer, vol. 109(3-4), pages 301-25, December. [Downloadable!] (restricted)
  3. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November. [Downloadable!] (restricted)
  4. Olivier Jean Blanchard & Danny Quah, 1990. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Garcia-Mila, Teresa, 1989. "Some empirical evidence on government purchase multipliers," Economics Letters, Elsevier, vol. 31(4), pages 375-380, December. [Downloadable!] (restricted)
  6. Burnside, Craig & Eichenbaum, Martin & Fisher, Jonas D. M., 2004. "Fiscal shocks and their consequences," Journal of Economic Theory, Elsevier, vol. 115(1), pages 89-117, March. [Downloadable!] (restricted)
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  7. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June. [Downloadable!] (restricted)
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  8. van Aarle, Bas & Garretsen, Harry & Gobbin, Niko, 2003. "Monetary and fiscal policy transmission in the Euro-area: evidence from a structural VAR analysis," Journal of Economics and Business, Elsevier, vol. 55(5-6), pages 609-638. [Downloadable!] (restricted)
  9. Roberto Perotti, 2002. "Estimating the effects of fiscal policy in OECD countries," Working Paper Series 168, European Central Bank. [Downloadable!]
  10. Alberto Alesina & Roberto Perotti, 1996. "Fiscal Adjustments in OECD Countries - Composition and Macroeconomic Effects," IMF Working Papers 96/70, International Monetary Fund.
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  11. 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. [Downloadable!] (restricted)
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  12. Blanchard, Olivier Jean, 1989. "A Traditional Interpretation of Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 79(5), pages 1146-64, December. [Downloadable!] (restricted)
  13. Alberto Alesina & Silvia Ardagna & Roberto Perotti & Fabio Schiantarelli, 2000. "Fiscal Policy, Profits, and Investment," Boston College Working Papers in Economics 504, Boston College Department of Economics. [Downloadable!]
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  14. Roberto Perotti, 2002. "Estimating the effects of fiscal policy in OECD countries," Economics Working Papers 015, European Network of Economic Policy Research Institutes. [Downloadable!]
  15. Ahmed, Shaghil & Yoo, Byung Sam, 1995. "Fiscal Trends in Real Economic Aggregates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 985-1001, November. [Downloadable!] (restricted)
  16. Roberto Perotti, . "Estimating the effects of fiscal policy in OECD countries," Working Papers 276, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  17. Ohanian, Lee E, 1997. "The Macroeconomic Effects of War Finance in the United States: World War II and the Korean War," American Economic Review, American Economic Association, vol. 87(1), pages 23-40, March. [Downloadable!] (restricted)
  18. Finn, Mary G, 1998. "Cyclical Effects of Government's Employment and Goods Purchases," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 635-57, August.
  19. Ludvigson, Sydney, 1996. "The macroeconomic effects of government debt in a stochastic growth model," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 25-45, August. [Downloadable!] (restricted)
  20. Alesina, A. & Perotti, R., 1995. "Fiscal Expansions and Adjustments in OECD Countries," Discussion Papers 1995_25, Columbia University, Department of Economics.
  21. Barry, Frank & Devereux, Michael B., 2003. "Expansionary fiscal contraction: A theoretical exploration," Journal of Macroeconomics, Elsevier, vol. 25(1), pages 1-23, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Razzak, Weshah, 2005. "Explaining the gaps in labour productivity in some developed countries," MPRA Paper 1888, University Library of Munich, Germany, revised May 2006. [Downloadable!]
    Other versions:
  2. Razzak, Weshah, 2006. "Explaining the gaps in labour productivity for some developed countries," MPRA Paper 53, University Library of Munich, Germany. [Downloadable!]
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