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A New Measure of Fiscal Shocks Based on Budget Forecasts and its Implications

  • Manuel Coutinho Pereira

This paper develops a new measure of US fiscal policy shocks that intends to avoid the anticipation problem affecting conventional measures, being also arguably free from endogeneity. The shocks are intended to capture changes to the component of anticipated fiscal policy that is exogenous to economic developments. Key economic variables such as output and interest rates respond quickly and significantly to a realization of the estimated shock and, in the first part of the sample, 1969-1988, in a way consistent with the Keynesian prior. In contrast, over the period 1989-2008 the effects are at odds with that prior, with fiscal loosening producing contractionary impacts.

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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200921.

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Date of creation: 2009
Date of revision:
Handle: RePEc:ptu:wpaper:w200921
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  1. 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.
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  4. Alan J. Auerbach, 2009. "Implementing the New Fiscal Policy Activism," NBER Working Papers 14725, National Bureau of Economic Research, Inc.
  5. Alan Auerbach, 2002. "Is There a Role for Discretionary Fiscal Policy?," NBER Working Papers 9306, National Bureau of Economic Research, Inc.
  6. Thomas Laubach, 2003. "New evidence on the interest rate effects of budget deficits and debt," Finance and Economics Discussion Series 2003-12, Board of Governors of the Federal Reserve System (U.S.).
  7. Giavazzi, Francesco & Jappelli, Tullio & Pagano, Marco, 2000. "Searching for non-linear effects of fiscal policy: Evidence from industrial and developing countries," European Economic Review, Elsevier, vol. 44(7), pages 1259-1289, June.
  8. Wendy Edelberg & Martin Eichenbaum & Jonas D.M. Fisher, 1998. "Understanding the Effects of a Shock to Government Purchases," NBER Working Papers 6737, National Bureau of Economic Research, Inc.
  9. Thorbecke, Willem, 1993. "Why deficit news affects interest rates," Journal of Policy Modeling, Elsevier, vol. 15(1), pages 1-11, February.
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  11. Giavazzi, Francesco & Pagano, Marco, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," CEPR Discussion Papers 417, C.E.P.R. Discussion Papers.
  12. repec:tpr:qjecon:v:115:y:2000:i:1:p:147-180 is not listed on IDEAS
  13. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  14. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
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  16. Roberto Perotti, 2004. "Estimating the effects of fiscal policy in OECD countries," Working Papers 276, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  17. Christina D. Romer & David H. Romer, 2007. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," NBER Working Papers 13264, National Bureau of Economic Research, Inc.
  18. repec:tpr:qjecon:v:114:y:1999:i:4:p:1399-1436 is not listed on IDEAS
  19. Auerbach, Alan J., 1999. "On the Performance and Use of Government Revenue Forecasts," National Tax Journal, National Tax Association, vol. 52(n. 4), pages 765-82, December.
  20. J. D. Foster & James C. Miller, 2000. "The Tyranny of Budget Forecasts," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 205-215, Summer.
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  23. Mehra, Yash P, 1997. "A Federal Funds Rate Equation," Economic Inquiry, Western Economic Association International, vol. 35(3), pages 621-30, July.
  24. Wachtel, Paul & Young, John, 1987. "Deficit Announcements and Interest Rates," American Economic Review, American Economic Association, vol. 77(5), pages 1007-12, December.
  25. Kitchen, John, 1996. "Domestic and international financial market responses to Federal deficit announcements," Journal of International Money and Finance, Elsevier, vol. 15(2), pages 239-254, April.
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