Using Stock Returns to Identify Government Spending Shocks

23 Pages Posted: 10 May 2010

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

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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

Tulane University - Finance & Economics ( email )

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

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