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In Search of the Transmission Mechanism of Fiscal Policy

In: NBER Macroeconomics Annual 2007, Volume 22

  • Roberto Perotti

Most economists would agree that a hike in the federal funds rate will cause some slowdown in growth and inflation, and that the bulk of the empirical evidence is consistent with this statement. But perfectly reasonable economists can and do disagree even on the basic effects of a shock to government spending on goods and services: neoclassical models predict that private consumption and the real wage will fall, while some neo-keyenesian models predict the opposite. This paper discusses alternative time series methodologies to identify government spending shocks and to estimate their effects. Applying these methodologies to data from the US and three other OECD countries provides little evidence in favor of the neoclassical predictions. Using the US input-output tables, the paper then turns to industry-level evidence around two major military buildups to shed light on the effects of government spending shocks.

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This chapter was published in:
  • Daron Acemoglu & Kenneth Rogoff & Michael Woodford, 2008. "NBER Macroeconomics Annual 2007, Volume 22," NBER Books, National Bureau of Economic Research, Inc, number acem07-1, September.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 4084.
    Handle: RePEc:nbr:nberch:4084
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