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Fiscal Policy and Economic Activity: U.S. Evidence

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  • K Peren Arin

    (Massey University, Department of Commerce)

  • Faik Koray

    (Louisiana State University)

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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Bibliographic Info

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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Cited by:
  1. Razzak, Weshah, 2006. "Explaining the gaps in labour productivity for some developed countries," MPRA Paper 53, University Library of Munich, Germany.
  2. Razzak, Weshah, 2005. "Explaining the gaps in labour productivity in some developed countries," MPRA Paper 1888, University Library of Munich, Germany, revised May 2006.
  3. James Feyrer & Jay Shambaugh, 2012. "Global Savings and Global Investment: The Transmission of Identified Fiscal Shocks," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 95-114, May.
  4. Arin, K. Peren & Mamun, Abdullah & Purushothman, Nanda, 2009. "The effects of tax policy on financial markets: G3 evidence," Review of Financial Economics, Elsevier, vol. 18(1), pages 33-46, January.

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