State-Dependent Effects of Fiscal Policy
Steven M. Fazzari
Washington University in St. Louis
University of New South Wales
Irina B. Panovska
August 18, 2014
UNSW Business School Research Paper No. 2012-27C
We investigate the effects of government spending on U.S. output with a threshold structural vector autoregressive model. We consider Bayesian model comparison and generalized impulse response analysis to test for nonlinearities in the responses of output to government spending. Our empirical findings support state-dependent effects of fiscal policy, with the government spending multiplier larger and more persistent whenever there is considerable economic slack. Based on capacity utilization as the preferred threshold variable, the estimated multiplier is large (1.6) for a low-utilization regime that accounts for more than half of the sample observations from 1967-2012 according to the estimated threshold level.
Number of Pages in PDF File: 49
Keywords: Government Spending, Threshold Model, Vector Autoregression, Nonlinear Dynamics, Impulse-Response Comparison, Bayesian
JEL Classification: C32, E32, E62
Date posted: April 30, 2012 ; Last revised: August 19, 2014
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