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Using Stock Returns to Identify Government Spending Shocks

  • JonasD.M. Fisher
  • Ryan Peters

This article explores a new approach to identifying government spending shocks which avoids many of the shortcomings of existing approaches. The new approach is to identify government spending shocks with statistical innovations to the accumulated excess returns of large US military contractors. This strategy is used to estimate the dynamic responses of output, hours, consumption and real wages to a government spending shock. We find that positive government spending shocks are associated with increases in output, hours and consumption. Real wages initially decline after a government spending shock and then rise after a year. We estimate the government spending multiplier associated with increases in military spending to be about 1.5 over a horizon of 5 years. Copyright � Federal Reserve Bank of Chicago. Journal compilation � Royal Economic Society 2010.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0297.2010.02355.x
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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 120 (2010)
Issue (Month): 544 (05)
Pages: 414-436

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Handle: RePEc:ecj:econjl:v:120:y:2010:i:544:p:414-436
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  1. repec:dgr:kubcen:200231 is not listed on IDEAS
  2. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
  3. J. Galí & D. López-Salido & J. Vallés, 2003. "Understanding the effects of government spending on consumption," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  4. Mountford, Andrew & Uhlig, Harald, 2002. "What are the Effects of Fiscal Policy Shocks?," CEPR Discussion Papers 3338, C.E.P.R. Discussion Papers.
  5. Roberto Perotti, 2002. "Estimating the effects of fiscal policy in OECD countries," Economics Working Papers 015, European Network of Economic Policy Research Institutes.
  6. Craig Burnside & Martin Eichenbaum & Jonas Fisher, 2003. "Fiscal Shocks and Their Consequences," NBER Working Papers 9772, National Bureau of Economic Research, Inc.
  7. 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.
  8. Perotti, Roberto, 2002. "Estimating the effects of fiscal policy in OECD countries," Working Paper Series 0168, European Central Bank.
  9. Roberto Perotti, 2007. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Working Papers 13143, National Bureau of Economic Research, Inc.
  10. Eichenbaum, Martin & Fisher, Jonas D M, 2005. "Fiscal Policy in the Aftermath of 9/11," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(1), pages 1-22, February.
  11. Fatás, Antonio & Mihov, Ilian, 2001. "The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence," CEPR Discussion Papers 2760, C.E.P.R. Discussion Papers.
  12. Wendy Edelberg & Martin Eichenbaum & Jonas D.M. Fisher, 1998. "Understanding the Effects of a Shock to Government Purchases," NBER Working Papers 6737, National Bureau of Economic Research, Inc.
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