Hostname: page-component-cb9f654ff-plnhv Total loading time: 0.001 Render date: 2025-08-27T21:23:55.106Z Has data issue: false hasContentIssue false
  • English
  • Français

The economic effects of government spending: using expectations data to control for information

Published online by Cambridge University Press:  30 July 2021

Matthew Hall  and
Aditi Thapar
Matthew Hall
Affiliation:
Boston Consulting Group
Aditi Thapar*
Affiliation:
University of Michigan, Ann Arbor, MI 48104, USA
*
*Corresponding author. Email: aditi@aditithapar.com
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We present a new methodology that uses professional forecasts to estimate the effects of fiscal policy. We use short-term forecasts to better identify exogenous shocks to government spending by controlling for anticipatory information already in the public domain. We use longer-term forecasts to net out expectations from the future path of other variables, which improves accuracy and efficiency by focusing on more precise measures of the impact of shocks. We show that this improves the statistical fit relative to both local projection methods and vector autoregression-based analyses that do not control for the entire future path of expectations.

Keywords

Fiscal policymultipliersimpulse responseforecastsE62E30H30

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 1 , January 2023 , pp. 141 - 170
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© Cambridge University Press 2021

References

Auerbach, A. and Gorodnichenko, Y. (2012) Measuring the output responses to fiscal policy. American Economic Journal: Economic Policy 4(2), 1–27.Google Scholar
Bachmann, R. and Sims, E. (2012) Confidence and the transmission of government spending shocks. Journal of Monetary Economics 59(3), 235–249.CrossRefGoogle Scholar
Barro, R. J. and Redlick, C. J. (2011) Macroeconomic effects from government purchases and taxes. The Quarterly Journal of Economics 126, 51–102.CrossRefGoogle Scholar
Biolsi, C. (2017) Nonlinear effects of fiscal policy over the business cycle. Journal of Economic Dynamics & Control 78, 54–87.CrossRefGoogle Scholar
Blanchard, O. and Perotti, R. (2002) An empirical characterization of the dynamic effects of changes in government spending and taxes on output. Quarterly Journal of Economics 117(4), 1329–1368.CrossRefGoogle Scholar
Blanchard, O. and Leigh, D. (2013) Growth forecast errors and fiscal multipliers. American Economic Review 103(3), 117–120.CrossRefGoogle Scholar
Canova, F. and Pappa, E. (2007) Price differentials in monetary unions: The role of fiscal shocks. Economic Journal 117, 713–737.CrossRefGoogle Scholar
Cogan, J. F., Cwik, T. J., Taylor, J. B., and Wieland, V. (2010) New Keynesian versus old Keynesian government spending multipliers. Journal of Economic Dynamics and Control 34, 281–295.CrossRefGoogle Scholar
Croushore, D. (1993) Introducing: The survey of professional forecasters. Federal Reserve Bank of Philadelphia. Business Review, November/December, 3–15.Google Scholar
d’Alessandro, A., Fella, G., and Melosi, L. (2019) Fiscal stimulus with learning-by-doing. International Economic Review 60(3), 1413–1432.CrossRefGoogle Scholar
Dominguez, K. M. E. and Shapiro, M. D. (2013) Forecasting the recovery from the great recession: Is this time different? American Economic Review 103(3), 147–152.CrossRefGoogle Scholar
Eichenbaum, Martin, and Fisher, Jonas D.M. (2005) Fiscal Policy in the Aftermath of 9/11. Journal of Money, Credit, and Banking 37(1), 1–22.CrossRefGoogle Scholar
Favero, C. and Giavazzi, F. (2012) Measuring tax multipliers: The narrative method in fiscal VARs. American Economic Journal: Economic Policy 4(2), 69–94.Google Scholar
Galí, J., López-Salido, J. D., and Vallés, J. (2007) Understanding the effects of government spending on consumption. Journal of the European Economic Association 5, 227–270.CrossRefGoogle Scholar
Giorno, C., Richardson, P., Roseveare, D., and van den Noord, P. (1995) Estimating potential output, output gaps and structural budget balances. OECD Economics Department Working Papers No. 152.Google Scholar
Gordon, R. J. and Krenn, R. (2010) The end of the great depression 1939–41: Policy contributions and fiscal multipliers. NBER Working Papers. No. 16380.Google Scholar
Jordá, O. (2005) Estimation and inference of impulse responses by local projections. American Economic Review 95(1), 161–182.CrossRefGoogle Scholar
Jø rgensen, P. L. and S. H. Ravn (2020) The inflation response to government spending shocks: A fiscal price puzzle? Working paper.Google Scholar
Kilian, L. and Kim, J. (2011) How reliable are local projections estimators of impulse responses? Review of Economics and Statistics 93(4), 1460–1466.CrossRefGoogle Scholar
Kilian, L. and Hicks, B. (2013) Did unexpectedly strong economic growth cause the oil price shock of 2003–2008? Journal of Forecasting 32, 385–394.CrossRefGoogle Scholar
Mountford, A. and Uhlig, H. (2009) What are the effects of fiscal policy shocks? Journal of Applied Econometrics 24, 960–992.CrossRefGoogle Scholar
Nakamura, E. and Steinsson, J. (2014) Fiscal stimulus in a monetary union: Evidence from US regions. American Economic Review 104(3), 753–792.CrossRefGoogle Scholar
Plagborg-Mø ller, M. and C. Wolf (2020) Local projections and VARs estimate the same impulse responses. Econometrica, forthcoming.CrossRefGoogle Scholar
Perotti, R. (2011) Expectations and fiscal policy: An empirical investigation. IGIER Working Paper 429.Google Scholar
Perotti, R. (2007) In search of the transmission mechanism of fiscal policy. NBER Macroeconomics Annual 22, 169–249.CrossRefGoogle Scholar
Ramey, V. A. (2016) Macroeconomic shocks and their propagation. NBER Working Paper Series, No. 21978.Google Scholar
Ramey, V. A. (2011a) Can government purchases stimulate the economy? Journal of Economic Literature 49(3), 673–685.CrossRefGoogle Scholar
Ramey, V. A. (2011b) Identifying government spending shocks: It’s all in the timing. Quarterly Journal of Economics 126(1), 1–50.CrossRefGoogle Scholar
Ramey, V. A. and Shapiro, M. D. (1998) Costly capital reallocation and the effects of government spending. Carnegie-Rochester Conference Series on Public Policy 48, 145–194.CrossRefGoogle Scholar
Ramey, V. A. and Zubairy, S. (2018) Government spending multipliers in good times and in bad: Evidence from 20th century historical data. Journal of Political Economy 126(2), 850–901.CrossRefGoogle Scholar
Romer, C. D. and Romer, D. H. (2010) The macroeconomic effects of tax changes: Estimates based on a new measure of fiscal shocks. American Economic Review 100(3), 763–801.CrossRefGoogle Scholar
Sheremirov, V. and Spirovska, S. (2019) Fiscal multipliers in advanced and developing countries: Evidence from military spending. Working paper.Google Scholar
Sims, E. and Wolff, J. (2018a) The state-dependent effects of tax shocks European Economic Review 107, 57–85.CrossRefGoogle Scholar
Sims, E. and Wolff, J. (2018b) The output and welfare effects of government spending shocks over the business cycle. International Economic Review 59(3), 1403–1435.CrossRefGoogle Scholar
Thapar, A. (2008) Using private forecasts to estimate the effects of monetary policy. Journal of Monetary Economics 55, 806–824.CrossRefGoogle Scholar
Thapar, A. (2019) The ineffectiveness of fiscal policy in recessions: Size does matter. Working paper.Google Scholar