Fiscal Foresight and the Effects of Goverment Spending
36 Pages Posted: 19 Jul 2010
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: Suggested Citation
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Fiscal Foresight and the Effects of Goverment Spending
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