How Does the U.S. Government Finance Fiscal Shocks?
Poole College of Management, NC State University
Hanno N. Lustig
Stanford Graduate School of Business; National Bureau of Economic Research (NBER)
Carnegie Mellon University - David A. Tepper School of Business
May 20, 2011
American Economic Journal: Macroeconomics, 2012, vol. 4(1)
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.
Number of Pages in PDF File: 56
Keywords: Fiscal shocks, fiscal adjustment, defense spending, bond returns, debt maturity
JEL Classification: C5, E4, E6, G1, H6
Date posted: March 6, 2009 ; Last revised: August 27, 2012