Using Stock Returns to Identify Government Spending Shocks

40 Pages Posted: 18 Sep 2009

See all articles by Jonas D. M. Fisher

Jonas D. M. Fisher

Federal Reserve Bank of Chicago - Economic Research Department

Ryan H. Peters

Tulane University - Finance & Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 16, 2009

Abstract

This paper explores a new approach to identifying government spending shocks which avoids many of the shortcomings of existing approaches. The new approach is to identify government spending shocks with statistical innovations to the accumulated excess returns of large US military contractors. This strategy is used to estimate the dynamic responses of output, hours, consumption and real wages to a government spending shock. We find that positive government spending shocks are associated with increases in output, hours, and consumption. Real wages initially decline after a government spending shock and then rise after a year. We estimate the government spending multiplier associated with increases in military spending to be about 1.5 over a horizon of 5 years.

Keywords: government spending shocks, fiscal policy, stock returns, neo-classical model, New Keynesian model

JEL Classification: E, E3, E6

Suggested Citation

Fisher, Jonas D. M. and Peters, Ryan H., Using Stock Returns to Identify Government Spending Shocks (September 16, 2009). FRB of Chicago Working Paper No. 2009-03, Available at SSRN: https://ssrn.com/abstract=1474766 or http://dx.doi.org/10.2139/ssrn.1474766

Jonas D. M. Fisher (Contact Author)

Federal Reserve Bank of Chicago - Economic Research Department ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
United States

Ryan H. Peters

Tulane University - Finance & Economics ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

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