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
Date Written: May 20, 2011
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: Suggested Citation