An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output
Olivier J. Blanchard
National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics
Bocconi University - Department of Economics; European University Institute - Economics Department (ECO); Centre for Economic Policy Research (CEPR)
NBER Working Paper No. w7269
This paper characterizes the dynamic effects of shocks in government spending and taxes on economic activity in the United States in the post-war period. It does so by using a mixed structural VAR/event study approach. Identification is achieved by using institutional information about the tax and transfer systems and the timing of tax collections to identify the automatic response of taxes and spending to activity, and, by implication, to infer fiscal shocks. The results consistently show positive government spending shocks as having a positive effect on output, and positive tax shocks as having a negative effect. The multipliers for both spending and tax shocks are typically small. Turning to the effects of taxes and spending on the components of GDP, one of the results has a distinctly non-standard flavor: Both increases in taxes and increases in government spending have a strong negative effect on investment spending.
Number of Pages in PDF File: 52
Date posted: March 16, 2000