How Does the U.S. Government Finance Fiscal Shocks?

American Economic Journal: Macroeconomics, 2012, vol. 4(1)

56 Pages Posted: 6 Mar 2009 Last revised: 27 Aug 2012

Antje Berndt

Australian National University

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Sevin Yeltekin

Carnegie Mellon University - David A. Tepper School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 20, 2011

Abstract

We develop a method for identifying and quantifying the fiscal channels that help finance government spending shocks. We define fiscal shocks as surprises in defense spending and show that they are more precisely identified when defense stock data are used in addition to aggregate macroeconomic data. Our results show that in the postwar period, about 9% of the U.S. government’s unanticipated spending needs were financed by a reduction in the market value of debt and more than 70% by an increase in primary surpluses. Additionally, we find that long-term debt is more effective at absorbing fiscal risk than short-term debt.

Keywords: Fiscal shocks, fiscal adjustment, defense spending, bond returns, debt maturity

JEL Classification: C5, E4, E6, G1, H6

Suggested Citation

Berndt, Antje and Lustig, Hanno N. and Yeltekin, Sevin, How Does the U.S. Government Finance Fiscal Shocks? (May 20, 2011). American Economic Journal: Macroeconomics, 2012, vol. 4(1). Available at SSRN: https://ssrn.com/abstract=1354699

Antje Berndt

Australian National University ( email )

Kingsley st.
acton, ACT 0200
Australia

Hanno N. Lustig (Contact Author)

Stanford Graduate School of Business ( email )

Stanford GSB
655 Knight Way
Stanford, CA California 94305-6072
United States
3108716532 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sevin Yeltekin

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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