Using Stock Returns to Identify Government Spending Shocks

23 Pages Posted: 10 May 2010  

Jonas D. M. Fisher

Federal Reserve Bank of Chicago - Economic Research Department

Ryan H. Peters

University of Pennsylvania - The Wharton School; Federal Reserve Bank of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: 2010-02-20

Abstract

This article 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.

Suggested Citation

Fisher, Jonas D. M. and Peters, Ryan H., Using Stock Returns to Identify Government Spending Shocks (2010-02-20). The Economic Journal, Vol. 120, Issue 544, pp. 414-436, May 2010. Available at SSRN: https://ssrn.com/abstract=1601551 or http://dx.doi.org/10.1111/j.1468-0297.2010.02355.x

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

University of Pennsylvania - The Wharton School ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
(312) 322-5969 (Phone)

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