Fiscal Foresight and the Effects of Goverment Spending

36 Pages Posted: 19 Jul 2010

See all articles by Mario Forni

Mario Forni

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; Centre for Economic Policy Research (CEPR)

Luca Gambetti

Universitat Pompeu Fabra - Department of Economics and Business (DEB)

Date Written: May 2010

Abstract

We study the effects of government spending by using a structural, large dimensional, dynamic factor model. We find that the government spending shock is non-fundamental for the variables commonly used in the structural VAR literature, so that its impulse response functions cannot be consistently estimated by means of a VAR. Government spending raises both consumption and investment, with no evidence of crowding out. The impact multiplier is 1.7 and the long run multiplier is 0.6.

Keywords: fiscal policy, fundamentalness, government spending shock, non-fundamentalness, sign restrictions, structural factor model

JEL Classification: C32, E32, E62

Suggested Citation

Forni, Mario and Gambetti, Luca, Fiscal Foresight and the Effects of Goverment Spending (May 2010). CEPR Discussion Paper No. DP7840, Available at SSRN: https://ssrn.com/abstract=1640362

Mario Forni (Contact Author)

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics ( email )

Viale Berengario 51
41100 Modena, Modena 41100
Italy
+39 059 205 6852 (Phone)
+39 059 205 6947 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luca Gambetti

Universitat Pompeu Fabra - Department of Economics and Business (DEB) ( email )

Barcelona, 08005
Spain

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