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Measuring the Effect of Government Spending Shocks on Output: A Factor-Augmented VAR Approach

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  • Philip Vinson

Abstract

Using a factor-augmented vector auto-regression model and quarterly U.S. data from 1960 to 2019, I estimate the effect of changes in government spending on key economic variables such as output and household consumption. Unlike previous studies which show a positive effect of government spending on output, I find that adding factors to the VAR model erases the positive effect of spending and reveals a small but statistically significant negative response in output and consumption. Other instances of crowding out include increases in interest rates and price levels and decreases in investment and net exports.

Suggested Citation

  • Philip Vinson, 2026. "Measuring the Effect of Government Spending Shocks on Output: A Factor-Augmented VAR Approach," Public Finance Review, , vol. 54(2), pages 237-274, March.
    • Handle: RePEc:sae:pubfin:v:54:y:2026:i:2:p:237-274
    DOI: 10.1177/10911421251391425
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    References listed on IDEAS

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    1. Renée Fry & Adrian Pagan, 2011. "Sign Restrictions in Structural Vector Autoregressions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 938-960, December.
    2. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
    3. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 387-422.
    4. Matteo Fragetta & Emanuel Gasteiger, 2014. "Fiscal Foresight, Limited Information and the Effects of Government Spending Shocks," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 76(5), pages 667-692, October.
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