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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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File URL: http://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/460.pdf
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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 460.

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Date of creation: May 2010
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Handle: RePEc:bge:wpaper:460
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