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An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output

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  • Olivier Blanchard
  • Roberto Perotti

Abstract

This paper characterizes the dynamic effects of shocks in government spending and taxes on U. S. activity in the postwar period. It does so by using a mixed structural VAR/event study approach. Identification is achieved by using institutional information about the tax and transfer systems to identify the automatic response of taxes and spending to activity, and, by implication, to infer fiscal shocks. The results consistently show positive government spending shocks as having a positive effect on output, and positive tax shocks as having a negative effect. One result has a distinctly nonstandard flavor: both increases in taxes and increases in government spending have a strong negative effect on investment spending.

Suggested Citation

  • 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, President and Fellows of Harvard College, vol. 117(4), pages 1329-1368.
    • Handle: RePEc:oup:qjecon:v:117:y:2002:i:4:p:1329-1368.
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    File URL: http://hdl.handle.net/10.1162/003355302320935043
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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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