State-Dependent Effects of Fiscal Policy
Steven M. Fazzari
Washington University in St. Louis
University of New South Wales
Irina B. Panovska
November 26, 2013
UNSW Australian School of Business Research Paper No. 2012-27B
We investigate the effects of government spending on U.S. output with a threshold structural vector autoregressive model. We provide formal comparisons for nonlinearity in the responses of output to government spending and develop a method to compare the difference between impulse response functions across states of the economy. Our empirical findings support state-dependent effects of fiscal policy. The government spending multiplier is larger and more persistent when capacity utilization is low. The estimated multiplier is large (1.6) for more than half of the sample observations, even when the interest rate is not at the zero lower bound.
Number of Pages in PDF File: 44
Keywords: Government Spending, Threshold Model, Vector Autoregression, Nonlinear Dynamics, Impulse-Response Comparison, Bayesian
JEL Classification: C32, E32, E62working papers series
Date posted: April 30, 2012 ; Last revised: December 9, 2013
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