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The Dynamic Response of the Budget Balance to Tax, Spending and Output Shocks: Does Model Specification Matter?

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  • Hjelm, Göran

    (Department of Economics, Lund University)

Abstract

This paper estimates how the US budget responds to shocks in taxes, spending and output. In particular, we consider the dynamic adjustment of the two budget components (taxes and spending) to such shocks. The recently developed Generalized Impulse Response Function, which takes the historical distribution of the residuals into account, is applied. We select the 'correct' specification, estimate two VAR and two VEC models and compare the results. Our chosen specification suggests that tax, spending and output shocks generate deficits in the long run while the tax and output shocks generate a surplus in the short run. Moreover, model specification matters indeed.

Suggested Citation

  • Hjelm, Göran, 2001. "The Dynamic Response of the Budget Balance to Tax, Spending and Output Shocks: Does Model Specification Matter?," Working Papers 2001:2, Lund University, Department of Economics.
    • Handle: RePEc:hhs:lunewp:2001_002
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    References listed on IDEAS

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    Cited by:

    1. Albert Solé-Ollé & Pilar Sorribas-Navarro, 2009. "The dynamic adjustment of local government budgets: does Spain behave differently?," Working Papers 2009/7, Institut d'Economia de Barcelona (IEB).
    2. Albert Sol魏ll頍 & Pilar Sorribas-Navarro, 2012. "The dynamic adjustment of local government budgets: does Spain behave differently?," Applied Economics, Taylor & Francis Journals, vol. 44(25), pages 3203-3213, September.
    3. Albert Solé-Ollé & Pilar Sorribas-Navarro, 2012. "The dynamic adjustment of local government budgets: does Spain behave differently?," Applied Economics, Taylor & Francis Journals, vol. 44(25), pages 3203-3213, September.
    4. Ann Cavlovic & Kathleen Day, "undated". "Equalization and the Incentives for Growth: An Empirical Investigation of the "Tax-Back" Effect," Working Papers-Department of Finance Canada 2003-23, Department of Finance Canada.

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    More about this item

    Keywords

    Generalized impulse response function; Model specification; VAR; Budget deficit; Fiscal variables;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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