Dynamic Asymmetry and Fiscal Policy

Zanetti Chini, Emilio (2020): Dynamic Asymmetry and Fiscal Policy.

Abstract

We introduce a new time series model for public consumption expenditure, tax revenues and real income that is capable to incorporate oscillations characterized by asymmetric phase and duration (or dynamic asymmetry). A specific-to-general econometric strategy is implemented in order to exclude the null hypotheses that these variable are linear or symmetric and, consequently, to ensure that these can be parsimoniously modelled. The U.S. postwar data suggest that the dynamic asymmetry -- either in cycle, either in trend -- is effectively a reasonable hypothesis for government expenditure and tax revenue, but also that a simple vector model unifying the (different) nonlinearities of each single series is unfeasible. Such an \textquotedblleft Occam-razor\textquotedblright \hspace{1pt} failure hinders econometricians in building impulse responses for calculation of fiscal multiplier and is here circumvented via empirical indexes.

• Item Type: MPRA Paper
• Language: English
• Keywords: Nonlinearities, Spending, Modelling, Multiplier, Testing, Selection.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems

References

Auerbach, A., and Y. Gorodnichenko (2012): "Measuring the output responses to Fscal policy," American Economic Journal: Economic Policy, 4, 1-27. Blanchard, O., and D. Leigh (2013): "Growth forecast errors and fiscal multipliers", American Economic Review, 103, 117-20. Caggiano, G., E. Castelnuovo, V. Colombo, and G. Nodari (2015): "Estimating fiscal multipliers: News from a non-linear world," The Economic Journal, 125, 746-776. Luukkonen, R., P. Saikkonen, and T. Teräsvirta (1988): "Testing linearity against smooth transition autoregressive models", Biometrika, 75(3), 491-499. Ramey, V., and S. Zubairy (2018): "Government spending multipliers in good times and in bad: evidence from US historical data", Journal of Political Economy, 126, 850-901. Teräsvirta, T. (1994): "Specification, estimation and evaluation of smooth transition autoregressive models," Journal of the American Statistical Association, 89(425), 208�218. Woodford, M. (2011): "Simple analytics of the government expenditure multiplier," American Economic Journal: Macroeconomics, 3, 1-35. Zanetti Chini, E. (2018): "Forecasting dynamically asymmetric fluctuations of the U.S. business cycle," International Journal of Forecasting, 34, 711-734.