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Propagation Mechanisms for Government Spending Shocks: A Bayesian Comparison

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  • Anna Kormilitsina

    () (Southern Methodist University)

  • Sarah Zubairy

    () (Texas A&M University)

Abstract

The inability of a simple real business cycle model to predict a rise in consumption in response to increased government expenditures, observed in many empirical studies, has stimulated the development of alternative theories of government spending shocks. Using the Bayesian approach, we evaluate the quantitative performance of five extant models, and find that neither of the considered transmission mechanisms for government spending helps improve the fit of the baseline model. Moreover, we find that consumption decreases in all estimated models in response to a rise in government spending.

Suggested Citation

  • Anna Kormilitsina & Sarah Zubairy, 2016. "Propagation Mechanisms for Government Spending Shocks: A Bayesian Comparison," Departmental Working Papers 1608, Southern Methodist University, Department of Economics.
  • Handle: RePEc:smu:ecowpa:1608
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    1. repec:eee:dyncon:v:81:y:2017:i:c:p:140-161 is not listed on IDEAS
    2. Patrick Fève & Jean-Guillaume Sahuc, 2015. "On the size of the government spending multiplier in the euro area," Oxford Economic Papers, Oxford University Press, vol. 67(3), pages 531-552.
    3. Nooman Rebei, 2017. "Evaluating Changes in the Transmission Mechanism of Government Spending Shocks," IMF Working Papers 17/49, International Monetary Fund.
    4. Albonico, Alice & Paccagnini, Alessia & Tirelli, Patrizio, 2017. "Great recession, slow recovery and muted fiscal policies in the US," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 140-161.
    5. Anna Kormilitsina, 2016. "Is Government Spending Predetermined? A Test of Identification for Fiscal Policy Shocks," Departmental Working Papers 1607, Southern Methodist University, Department of Economics.
    6. Cristiano Cantore & Paul Levine & Giovanni Melina, 2014. "Deep versus superficial habit: It’s all in the persistence," School of Economics Discussion Papers 0714, School of Economics, University of Surrey.
    7. Régis Barnichon & Christian Matthes, 2016. "Understanding the size of the government spending multiplier: It's in the sign," Economics Working Papers 1555, Department of Economics and Business, Universitat Pompeu Fabra.

    More about this item

    Keywords

    government spending shock; Bayesian comparison; transmission mechanism; deep habits; rule of thumb consumers;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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