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The Effect of Fiscal Policy Shocks on the Flow of Funds

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  • Andrew Bossie

Abstract

This paper uses a selection of fiscal vector autoregression models to identify the effect of fiscal policy shocks on the private sectorâs balance sheet using the Flow of Funds. As well, I examine the response of treasury interest rates, the Federal Funds rate and the assets of the Federal Reserve to gauge the response of monetary policy to fiscal policy shocks. I find that the Federal Reserve does not respond to fiscal policy shocks in any significant way. I also find that the business sector responds to fiscal policy shocks but not very strongly. The household sector responds more clearly. Fiscal policy shocks have an effect on householdâs holdings of both short term liquid assets and long term illiquid assets. Spending shocks also have a clear effect on mortgage lending.

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  • Andrew Bossie, 2013. "The Effect of Fiscal Policy Shocks on the Flow of Funds," 2013 Papers pbo741, Job Market Papers.
    • Handle: RePEc:jmp:jm2013:pbo741
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    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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