Effects of government spending on consumption Dynamics

Takumah, Wisdom (2021): Effects of government spending on consumption Dynamics.

Abstract

The effects of fiscal policy on the economy is increasingly popular in the literature of empirical macroeconomics and factor-augmented vector autoregressive (FAVAR) models have become a popular tool in explaining how economic variables interact over time. This paper focused on the effect of fiscal policy on aggregate and disaggregated consumption by applying the factor-augmented vector Autoregression (FAVAR) model. The study estimated the FAVAR model using the computationally simpler principal component method. I found that government spending shock increases aggregate consumption; and there exists heterogeneity within durable, nondurable, and service consumption variables.

• Item Type: MPRA Paper
• Language: English
• Keywords: FAVAR model, Fiscal Policy, Government Spending Shocks, Aggregate Consumption
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E27 - Forecasting and Simulation: Models and Applications; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H5 - National Government Expenditures and Related Policies > H50 - General

References

Ben Zeev, N., Pappa, E. (2017). Chronicle of a war foretold: The macroeconomic effects of anticipated defense spending shocks. The Economic Journal, 127(603), 1568-1597.

Bernanke, B. S., Boivin, J., Eliasz, P. (2005). Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach. The Quarterly journal of economics, 120(1), 387-422.

Blanchard, O., Perotti, R. (2002). An empirical characterization of the dynamic effects of changes in government spending and taxes on output. The Quarterly Journal of economics, 117(4), 1329-1368.

Burnside, C., Eichenbaum, M., Fisher, J. D. (2004). Fiscal shocks and their consequences. Journal of Economic theory, 115(1), 89-117.

Crawford, C. (1967). A general method of rotation for factor analysis. In Paper Read at Spring Meeting of the Psychometric Society, Madison, WI, April 1, 1967. Fatas, A., Mihov, I. (2001). The effects of fiscal policy on consumption and employment: theory and evidence.

Fisher, J. D., Peters, R. (2010). Using stock returns to identify government spending shocks. The Economic Journal, 120(544), 414-436.

Forni, M., Gambetti, L. (2010). Fiscal foresight and the effects of government spending.

Fragetta, M., Gasteiger, E. (2014). Fiscal foresight, limited information and the effects of government spending shocks. Oxford Bulletin of Economics and Statistics, 76(5), 667-692.

Mountford, A., Uhlig, H. (2009). What are the effects of fiscal policy shocks?.

Journal of applied econometrics, 24(6), 960-992. Mulaik, S. A. (2009). Foundations of factor analysis. CRC press.

Pappa, E. (2009). The effects of fiscal shocks on employment and the real wage. International Economic Review, 50(1), 217-244.

Ramey, V. A. (2011). Identifying government spending shocks: It's all in the timing.

The Quarterly Journal of Economics, 126(1), 1-50. Ramey, V. A., Shapiro, M. D. (1998). Displaced capital (No. w6775). National Bureau of Economic Research.