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State-Dependent Effects of Fiscal Policy

  • Steven Fazzari

    (Washington University in St. Louis)

  • James Morley

    (School of Economics, University of New South Wales)

  • Irina Panovska

    ()

    (Washington University in St. Louis)

We investigate the effects of government spending on U.S. economic activity using a threshold version of a structural vector autoregressive model. Our empirical findings support state-dependent effects of fiscal policy. In particular, the effects of a government spending shock on output are significantly larger and more persistent when the economy has a high degree of underutilized resources than when the economy is close to capacity. This evidence is consistent with an underlying structure of the economy in which insufficient aggregate demand often constrains the level of economic activity.

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File URL: http://research.economics.unsw.edu.au/RePEc/papers/2012-27.pdf
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Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2012-27A.

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Length: 40 pages
Date of creation: Apr 2013
Handle: RePEc:swe:wpaper:2012-27a
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