What are the Effects of Fiscal Policy Shocks?

46 Pages Posted: 15 Jan 2009 Last revised: 17 Mar 2010

See all articles by Andrew Mountford

Andrew Mountford

Royal Holloway, University of London

Harald Uhlig

University of Chicago - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: December 2008

Abstract

We propose and apply a new approach for analyzing the effects of fiscal policy using vector autoregressions. Specifically, we use sign restrictions to identify a government revenue shock as well as a government spending shock, while controlling for a generic business cycle shock and a monetary policy shock. We explicitly allow for the possibility of announcement effects, i.e., that a current fiscal policy shock changes fiscal policy variables in the future, but not at present. We construct the impulse responses to three linear combinations of these fiscal shocks, corresponding to the three scenarios of deficit-spending, deficit-financed tax cuts and a balanced budget spending expansion. We apply the method to US quarterly data from 1955-2000. We find that deficit-financed tax cuts work best among these three scenarios to improve GDP, with a maximal present value multiplier of five dollars of total additional GDP per each dollar of the total cut in government revenue five years after the shock.

Suggested Citation

Mountford, Andrew and Uhlig, Harald, What are the Effects of Fiscal Policy Shocks? (December 2008). NBER Working Paper No. w14551. Available at SSRN: https://ssrn.com/abstract=1327224

Andrew Mountford

Royal Holloway, University of London ( email )

Royal Holloway, University of London
Egham
Surrey TW20 0EX
United Kingdom
+44 1784 443 906 (Phone)
+44 1784 439 534 (Fax)

HOME PAGE: http://personal.rhul.ac.uk/uhte/023/

Harald Uhlig (Contact Author)

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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