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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

    ()

    (Rauch Business Center, Lehigh University)

We investigate the effects of government spending on U.S. output with a threshold structural vector autoregressive model. We provide formal comparisons for nonlinearity in the responses of output to government spending and develop a method to compare the difference between impulse response functions across states of the economy. Our empirical findings support state-dependent effects of fiscal policy. The government spending multiplier is larger and more persistent when capacity utilization is low. The estimated multiplier is large (1.6) for more than half of the sample observations, even when the interest rate is not at the zero lower bound.

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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 2012-27B.

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Length: 44 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:swe:wpaper:2012-27b
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