Government Spending Reloaded: Fundamentalness and Heterogeneity in Fiscal SVARs

Ricco, Giovanni and Ellahie, Atif (2012): Government Spending Reloaded: Fundamentalness and Heterogeneity in Fiscal SVARs.

Abstract

Using a large information approach and full Bayesian VAR techniques, we study the economic effects of fiscal policy shocks in the U.S. over the last five decades. We find that omitted variables can explain the well known sample instability of the estimates for the fiscal multiplier. We also find evidence of fiscal foresight and anticipation of the government spending shocks recovered from small Structural VARs (SVARs). Despite incorporating forecasts of government spending, Expectational VARs (EVARs) also show signs of fiscal foresight and anticipation. Conversely, the fiscal shocks recovered from a large information BVAR do not exhibit the same problem. Moreover, large information SVARs and EVARs deliver identical dynamic responses to fiscal shocks. Finally, we report multipliers and impulse response functions for aggregate government spending as well as for components of government spending, and find remarkably heterogeneous responses.

• Item Type: MPRA Paper
• Language: English
• Keywords: structural VARs, large Bayesian VARs, fiscal shocks, government spending, government spending news, fiscal foresight, survey of professional forecasters
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles

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