State-Dependent Effects of Fiscal Policy

49 Pages Posted: 30 Apr 2012 Last revised: 19 Aug 2014

Steven M. Fazzari

Washington University in St. Louis

James Morley

University of New South Wales

Irina B. Panovska

Lehigh University

Date Written: August 18, 2014

Abstract

We investigate the effects of government spending on U.S. output with a threshold structural vector autoregressive model. We consider Bayesian model comparison and generalized impulse response analysis to test for nonlinearities in the responses of output to government spending. Our empirical findings support state-dependent effects of fiscal policy, with the government spending multiplier larger and more persistent whenever there is considerable economic slack. Based on capacity utilization as the preferred threshold variable, the estimated multiplier is large (1.6) for a low-utilization regime that accounts for more than half of the sample observations from 1967-2012 according to the estimated threshold level.

Keywords: Government Spending, Threshold Model, Vector Autoregression, Nonlinear Dynamics, Impulse-Response Comparison, Bayesian

JEL Classification: C32, E32, E62

Suggested Citation

Fazzari, Steven M. and Morley, James and Panovska, Irina B., State-Dependent Effects of Fiscal Policy (August 18, 2014). UNSW Business School Research Paper No. 2012-27C. Available at SSRN: https://ssrn.com/abstract=2045192 or http://dx.doi.org/10.2139/ssrn.2045192

Steven M Fazzari

Washington University in St. Louis ( email )

One Brookings Drive
St. Louis, MO 63130
United States
314-935-5693 (Phone)
314-935-4156 (Fax)

James Morley

University of New South Wales ( email )

High Street
Sydney, NSW 2052
Australia
+61 2 9385 3366 (Phone)

HOME PAGE: http://sites.google.com/site/jamescmorley/

Irina Panovska (Contact Author)

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

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