Second Thoughts on Estimating Expansionary Fiscal Policy E ffects in the United States

JIA, BIJIE (2018): Second Thoughts on Estimating Expansionary Fiscal Policy E ffects in the United States.

Abstract

This paper revisits mixed findings of the expansionary fiscal spending effect in the United States. An array of standard Vector-Autoregressive (VAR) models has been implemented to capture inconsistent effects of the fiscal expansion. Findings in this paper consistently reveal that without considering the influence of transfer payments, state and local government spending, and the timing of sample, measuring the effect of expanded government purchases along would result in an upward bias of the comprehensive fiscal stimulus effect. This paper questions the validity of using government purchases alone to precisely evaluate the effect of fiscal expansion.

• Item Type: MPRA Paper
• Language: English
• Keywords: E21; E32; E62; H30; H50.
• 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 > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General; H - Public Economics > H5 - National Government Expenditures and Related Policies > H50 - General

References

Aiyagari, S. R., L. J. Christiano, and M. Eichenbaum (1992): “The output, employment, and interest rate effects of government consumption,” Journal of Monetary Economics, 30.

Auerbach, A. J., and Y. Gorodnichenko (2012): “Fiscal multipliers in recession and expansion,” in Fiscal Policy after the Financial Crisis, NBER Chapters, pp. 63–98. National Bureau of Economic Research, Inc.

Awaworyi Churchill, S., and S. Yew (2017): “Are government transfers harmful to economic growth? A meta-analysis,” Economic Modelling, 64(C), 270–287.

Bachmann, R., and E. R. Sims (2012): “Confidence and the transmission of government spending shocks,” Journal of Monetary Economics, 59, 235–249.

Barro, R. J., and C. J. Redlick (2011): “Macroeconomic effects from government purchases and taxes,” The Quarterly Journal of Economics, 126(1), 51–102.

Baxter, M., and R. G. King (1993): “Fiscal Policy in General Equilibrium,” American Economic Review, 83(3), 315–334.

Blanchard, O., and R. Perotti (2002): “An empirical characterization of the dynamic effects of changes in government spending and taxes on output,” in The Quarterly Journal of Economics, pp. 1329–1368. MIT Press.

Burnside, C., M. Eichenbaum, and J. D. M. Fisher (2004): “Fiscal shocks and their consequences,” Journal of Economic Theory, 115(1), 89–117.

Cavallo, E. A. (2005): “Trade, gravity, and sudden stops: On how commercial trade can increase the stability of capital flows,” Working Paper 2005-23, Federal Reserve Bank of Atlanta.

Chodorow-Reich, G., L. Feiveson, Z. Liscow, and W. G. Woolston (2012): “Does State Fiscal Relief during Recessions Increase Employment? Evidence from the American Recovery and Reinvestment Act,” American Economic Journal: Economic Policy, 4(3), 118–45.

Cogan, J. F., and J. B. Taylor (2012): “What the Government Purchases Multiplier Actually Multiplied in the 2009 Stimulus Package,” in Government Policies and the Delayed Economic Recovery, ed. by L. E. Ohanian, J. B. Taylor, and I. J. Wright. Hoover Institution, Stanford University.

Corsetti, G., A. Meier, and G. J. Mu¨ller (2012): “What determines government spending multipliers?,” Economic Policy, 27(72), 521–565.

Devereux, M. B., A. C. Head, and B. J. Lapham (1996): “Monopolistic competition, increasing returns, and the effects of government spending,” Journal of Money, Credit and Banking, 28(2), 233–54.

Edelberg, W., M. Eichenbaum, and J. D. Fisher (1999): “Understanding the effects of a shock to government purchases,” Review of Economic Dynamics, 2(1), 166–206.

Enders, W. (2004): “Applied econometric time series”.

Fata´s, A., and I. Mihov (2001): “The effects of fiscal policy on consumption and employment: Theory and evidence,” CEPR Discussion Papers 2760, C.E.P.R. Discussion Papers.

Fazzari, S. M., J. Morley, and I. Panovska (2015): “State-dependent effects of fiscal policy,” Studies in Nonlinear Dynamics & Econometrics, 19(3), 285–315.

Feyrer, J., and B. Sacerdote (2011): “Did the Stimulus Stimulate? Real Time Estimates of the Effects of the American Recovery and Reinvestment Ac,” NBER working papers, National Bureau of Economic Research, Inc.

Fishback, P., and V. Kachanovskaya (2015): “The Multiplier for Federal Spending in the States During the Great Depression,” The Journal of Economic History, 75(01), 125–162.

Fishback, P. V., and V. Kachanovskaya (2010): “In Search of the Multiplier for Federal Spending in the States During the Great Depression,” NBER working papers, National Bureau of Economic Research, Inc.

Gal´ı, J., J. D. Lo´pez-Salido, and J. Valle´s (2007): “Understanding the effects of government spending on consumption,” Journal of the European Economic Association, 5(1), 227–270.

Giambattista, E., and S. Pennings (2017): “When is the government transfer multiplier large?,” Euro- pean Economic Review, 100, 525 – 543.

Hall, R. E. (1986): “The role of consumption in economic fluctuations,” in The American Business Cycle: Continuity and Change, NBER Chapters, pp. 237–266. National Bureau of Economic Research, Inc.

Hall, R. E. (2009): “By how much does GDP rise if the government buys more output?,” Brookings Papers on Economic Activity, 40(2), 183–249.

Hubbard, R., and O’Brien (2015): Macroeconomics. 5 ed.

Ilzetzki, E., E. G. Mendoza, and G. A. Vegh (2013): “How big (small) are fiscal multiplier?,” Journal of Monetary Economics, 60, 239–254.

Kim, H., and B. Jia (2018): “Government Spending Shocks and Private Activity: The Role of Sentiments,” unpublished manuscript.

Kim, H., J. Kim, and M. Stern (2015): “On the robustness of recursively identified VAR models,” Working Paper.

Kim, S., and N. Roubini (2008): “Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S,” Journal of International Economics, 74(2), 362–383.

Leeper, E. M., N. Traum, and T. B. Walker (2015): “Clearing Up the Fiscal Multiplier Morass,” Caepr Working Papers 2015-013 Classification-C, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.

McGrattan, E. R., and L. E. Ohanian (2008): “Does neoclassical theory account for the effects of big fiscal shocks? Evidence from World War II,” Discussion paper.

Mehrotra, N. R. (2018): “Fiscal Policy Stabilization: Purchases or Transfers?,” International Journal of Central Banking, 14(2), 1–50.

Monacelli, T., R. Perotti, and A. Trigari (2010): “Unemployment fiscal multipliers,” Journal of Monetary Economics, 57(5), 531–553.

Mountford, A., and H. Uhlig (2009): “What are the effects of fiscal policy shocks?,” Journal of Applied Econometrics, 24(6), 960–992.

Natvik, G. J. (2012): “Government spending shocks and rule-of-thumb consumers: The role of steady-state inequality,” The Scandinavian Journal of Economics, 114(4), 1414–1436.

Oh, H., and R. Reis (2012): “Targeted transfers and the fiscal response to the great recession, ”Journal of Monetary Economics, 59(S), 50–64.

Owyang, M. T., V. A. Ramey, and S. Zubairy (2013): “Are government spending multipliers greater during periods of slack? Evidence from 20th-century historical data,” NBER Working Papers 18769, National Bureau of Economic Research, Inc.

Pappa, E. (2009): “The effect of fiscal expansions: An international comparison,” Barcelona Economics Working Paper, 409.

Perotti, R. (2005): “Estimating the effects of fiscal policy in OECD countries,” Proceedings.

Perotti, R. (2014): “Defense Government Spending Is Contractionary, Civilian Government Spending Is Expansionary,” NBER working papers, National Bureau of Economic Research, Inc.

Ramey, V. A. (2011): “Can government purchases stimulate the economy?,” Journal of Economic Literature, 49:3, 673–685.

Ramey, V. A.(2012): “Government Spending and Private Activity,” in Fiscal Policy after the Financial Crisis, NBER Chapters, pp. 19–55. National Bureau of Economic Research, Inc.

Ramey, V. A., and M. D. Shapiro (1998): “Costly capital reallocation and the effects of government spending,” Carnegie-Rochester Conference Series on Public Policy, 48(1), 145–194.

Rotemberg, J. J., and M. Woodford (1992): “Oligopolistic pricing and the effects of aggregate demand on economic activity,” Journal of Political Economy, 100(6), 1153–1207.

Stock, J., C. Sims, and M. Watson (1990): “Inference in Linear Time Series Models with Some Unit Roots,” Econometrica, 58(1), 113–144.

Tenhofen, J., and G. Wolff (2007): “Does anticipation of government spending matter? Evidence from an expectation augmented VAR,” Discussion Paper Series 1: Economic Studies 2007,14, Deutsche Bundesbank.

Wilson, D. J. (2012): “Fiscal Spending Jobs Multipliers: Evidence from the 2009 American Recovery and Reinvestment Act,” American Economic Journal: Economic Policy, 4(3), 251–82.

Zeev, N. B., and E. Pappa (2015): “Multipliers of unexpected increases in defense spending: An empirical investigation,” Journal of Economic Dynamics and Control, 57(C), 205–226.