State-Dependent Effects of Fiscal Policy
Steven M. Fazzari
Washington University in St. Louis
University of New South Wales
Irina B. Panovska
Lehigh University; Washington University in Saint Louis
UNSW Australian School of Business Research Paper No. 2012-27A
We investigate the effects of government spending on U.S. economic activity using a threshold version of a structural vector autoregressive model. Our empirical findings support state-dependent effects of fiscal policy. In particular, the effects of a government spending shock on output are significantly larger and more persistent when the economy has a high degree of underutilized resources than when the economy is close to capacity. This evidence is consistent with an underlying structure of the economy in which insufficient aggregate demand often constrains the level of economic activity.
Number of Pages in PDF File: 40
Keywords: Government Spending, Threshold Model, Vector Autoregression, Nonlinear Dynamics
JEL Classification: C32, E32, E62working papers series
Date posted: April 30, 2012 ; Last revised: May 13, 2013
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