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State-Dependent Effects of Fiscal Policy

Steven M. Fazzari

Washington University in St. Louis

James Morley

University of New South Wales

Irina B. Panovska

Lehigh University

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

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Date posted: April 30, 2012 ; Last revised: August 19, 2014

Suggested Citation

Fazzari, Steven M. and Morley, James and Panovska, Irina B., State-Dependent Effects of Fiscal Policy (August 18, 2014). UNSW Business School Research Paper No. 2012-27C. Available at SSRN: http://ssrn.com/abstract=2045192 or http://dx.doi.org/10.2139/ssrn.2045192

Contact Information

Steven M Fazzari
Washington University in St. Louis ( email )
One Brookings Drive
St. Louis, MO 63130
United States
314-935-5693 (Phone)
314-935-4156 (Fax)
James Morley
University of New South Wales ( email )
High Street
Sydney, NSW 2052
+61 2 9385 3366 (Phone)
HOME PAGE: http://sites.google.com/site/jamescmorley/

Irina Panovska (Contact Author)
Lehigh University ( email )
621 Taylor Street
Bethlehem, PA 18015
United States
Feedback to SSRN

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