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How Does the US Government Finance Fiscal Shocks?

  • Antje Berndt
  • Hanno Lustig
  • Şevin Yeltekin

We develop a method for identifying and quantifying the fiscal channels that help finance government spending shocks. We define fiscal shocks as surprises in defense spending and show that they are more precisely identified when defense stock data are used in addition to aggregate macroeconomic data. Our results show that in the postwar period, about 9 percent of the US government's unanticipated spending needs were financed by a reduction in the market value of debt and more than 70 percent by an increase in primary surpluses. Additionally, we find that long-term debt is more effective at absorbing fiscal risk than short-term debt. (JEL E62, H56, and H63)

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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 4 (2012)
Issue (Month): 1 (January)
Pages: 69-104

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Handle: RePEc:aea:aejmac:v:4:y:2012:i:1:p:69-104
Note: DOI: 10.1257/mac.4.1.69
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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  1. Campbell, John, 1993. "Intertemporal Asset Pricing Without Consumption Data," Scholarly Articles 3221491, Harvard University Department of Economics.
  2. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  3. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  4. Correia, Isabel & Nicolini, Juan Pablo & Teles, Pedro, 2003. "Optimal Fiscal and Monetary Policy: Equivalence Results," CEPR Discussion Papers 3730, C.E.P.R. Discussion Papers.
  5. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
  6. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," NBER Working Papers 5031, National Bureau of Economic Research, Inc.
  7. Christopher Sleet, 2004. "Optimal Taxation with Private Government Information," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 1217-1239, October.
  8. Hess Chung & Eric Leeper, 2007. "What Has Financed Government Debt?," Caepr Working Papers 2007-015, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  9. Jonas D. M. Fisher & Ryan Peters, 2009. "Using stock returns to identify government spending shocks," Working Paper Series WP-09-03, Federal Reserve Bank of Chicago.
  10. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
  11. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
  12. David S. Bizer & Steven N. Durlauf, 1990. "Testing the Positive Theory of Government Finance," NBER Working Papers 3349, National Bureau of Economic Research, Inc.
  13. Christopher Sleet, 2004. "Optimal Taxation with Private Government Information," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1217-1239.
  14. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
  15. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
  16. Hess, Gregory D, 1993. "A Test of the Theory of Optimal Taxation for the United States, 1869-1989," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 712-16, November.
  17. George-Marios Angeletos, 2002. "Fiscal Policy With Noncontingent Debt And The Optimal Maturity Structure," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1105-1131, August.
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