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Fiscal Foresight and the Effects of Government Spending

  • Mario Forni

    ()

  • Luca Gambetti

    ()

We study the effects of government spending by using a structural, large dimensional, dynamic factor model. We find that the government spending shock is non-fundamental for the variables commonly used in the structural VAR literature, so that its impulse response functions cannot be consistently estimated by means of a VAR. Government spending raises both consumption and investment, with no evidence of crowding out. The impact multiplier is 1.7 and the long run multiplier is 0.6.

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Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 851.10.

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Length: 34
Date of creation: 06 May 2010
Date of revision:
Handle: RePEc:aub:autbar:851.10
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  1. Bai, Jushan & Ng, Serena, 2007. "Determining the Number of Primitive Shocks in Factor Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 52-60, January.
  2. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2005. "The Generalized Dynamic Factor Model: One-Sided Estimation and Forecasting," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 830-840, September.
  3. Martin Eichenbaum & Jonas Fisher, 2004. "Fiscal Policy in the Aftermath of 9/11," NBER Working Papers 10430, National Bureau of Economic Research, Inc.
  4. Craig Burnside & Martin Eichenbaum & Jonas Fisher, 2003. "Fiscal Shocks and Their Consequences," NBER Working Papers 9772, National Bureau of Economic Research, Inc.
  5. Forni, Mario & Lippi, Marco, 2000. "The Generalized Dynamic Factor Model: Representation Theory," CEPR Discussion Papers 2509, C.E.P.R. Discussion Papers.
  6. Marco Lippi & Lucrezia Reichlin, 1994. "VAR analysis, non-fundamental representations, Blashke matrices," ULB Institutional Repository 2013/10151, ULB -- Universite Libre de Bruxelles.
  7. Sargent, Thomas J, 1989. "Two Models of Measurements and the Investment Accelerator," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 251-87, April.
  8. Alexei Onatski, 2009. "Testing Hypotheses About the Number of Factors in Large Factor Models," Econometrica, Econometric Society, vol. 77(5), pages 1447-1479, 09.
  9. Chamberlain, Gary & Rothschild, Michael, 1983. "Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets," Econometrica, Econometric Society, vol. 51(5), pages 1281-304, September.
  10. Forni, Mario & Gambetti, Luca, 2010. "The dynamic effects of monetary policy: A structural factor model approach," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 203-216, March.
  11. Ireland, Peter N., 2004. "A method for taking models to the data," Journal of Economic Dynamics and Control, Elsevier, vol. 28(6), pages 1205-1226, March.
  12. Jesús Fernández-Villaverde & Juan F. Rubio-Ramirez & Thomas J. Sargent & Mark Watson, 2006. "A,B,C's (and D's)'s for Understanding VARS," Levine's Bibliography 321307000000000646, UCLA Department of Economics.
  13. Forni, Mario & Giannone, Domenico & Lippi, Marco & Reichlin, Lucrezia, 2009. "Opening The Black Box: Structural Factor Models With Large Cross Sections," Econometric Theory, Cambridge University Press, vol. 25(05), pages 1319-1347, October.
  14. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
  15. Connor, Gregory & Korajczyk, Robert A., 1988. "Risk and return in an equilibrium APT : Application of a new test methodology," Journal of Financial Economics, Elsevier, vol. 21(2), pages 255-289, September.
  16. Amengual, Dante & Watson, Mark W., 2007. "Consistent Estimation of the Number of Dynamic Factors in a Large N and T Panel," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 91-96, January.
  17. Andrew Mountford & Harald Uhlig, 2008. "What are the Effects of Fiscal Policy Shocks?," NBER Working Papers 14551, National Bureau of Economic Research, Inc.
  18. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
  19. Eric Leeper & Todd Walker, 2011. "Information Flows and News Driven Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 55-71, January.
  20. Hallin, Marc & Liska, Roman, 2007. "Determining the Number of Factors in the General Dynamic Factor Model," Journal of the American Statistical Association, American Statistical Association, vol. 102, pages 603-617, June.
  21. Ben Bernanke & Jean Boivin & Piotr S. Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 387-422, January.
  22. Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, vol. 71(1), pages 135-171, January.
  23. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
  24. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2008. "Fiscal Foresight: Analytics and Econometrics," Caepr Working Papers 2008-013, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  25. Evi Pappa, 2009. "The Effects Of Fiscal Shocks On Employment And The Real Wage," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 217-244, 02.
  26. Sumru Altug, 1986. "Time to build and aggregate fluctuations: some new evidence," Working Papers 277, Federal Reserve Bank of Minneapolis.
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