How Does the U.S. Government Finance Fiscal Shocks?
Carnegie Mellon University - Tepper School of Business
Hanno N. Lustig
UCLA - Anderson School of Management; National Bureau of Economic Research (NBER)
Carnegie Mellon University - David A. Tepper School of Business
NBER Working Paper No. w16458
We develop a method for identifying and quantifying the fiscal channels that help finance government spending shocks. We define fiscal shocks as surprises in defense spending and show that they are more precisely identified when defense stock data are used in addition to aggregate macroeconomic data. Our results show that in the postwar period, over 9% of the U.S. government's unanticipated spending needs were financed by a reduction in the market value of debt and more than 73% by an increase in primary surpluses. Additionally, we find that long-term debt is more effective at absorbing fiscal risk than short-term debt.
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Number of Pages in PDF File: 51working papers series
Date posted: October 18, 2010
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