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Jargon Alert on the Fiscal Multiplier
A Local-Spillover Decomposition of the Causal Effect of U.S. Defense Spending Shocks
This paper decomposes the causal effect of government defense spending into: (i) a local (or direct) effect, and (ii) a spillover (or indirect) effect. Using state-level defense spending data, we show that a negative cross-state spillover effect explains the existing simultaneous findings of a low aggregate multiplier and a high local multiplier. We show that enlisting disaggregate data improves the precision of aggregate effect estimates, relative to using aggregate time series alone. Moreover, we compare two-step efficient GMM with two alternative moment weighting approaches used in ...
Are the Effects of Fiscal Policy Asymmetric?
Economic research on the size of the fiscal multiplier has assumed that the effects of changes in government spending are symmetric ? that is, they influence economic output to the same degree whether the change is an increase or a decrease. Richmond Fed research indicates that this is not the case; the fiscal multiplier does vary according to the direction of the fiscal action and also varies with the stage of the economic cycle. This finding sheds light on likely outcomes of fiscal policies and helps account for inconsistent estimates of the multiplier in the literature.
Policy Paradoxes in the New Keynesian Model
The most common New-Keynesian model--with sticky-prices--has potentially implausible implications in a zero-lower bound environment. Fiscal and forward guidance multipliers can be implausibly large. Moreover, the sticky-price model implies that positive supply shocks, such as an increase in productivity, will lower production, and that increased price flexibility can exacerbate such a decline in output (as well as amplifying the effects of other shocks). These results are fragile and disappear under a plausible alternative to sticky prices--sticky information: Fiscal and monetary multipliers ...
Identifying shocks via time-varying volatility
An n-variable structural vector auto-regression (SVAR) can be identified (up to shock order) from the evolution of the residual covariance across time if the structural shocks exhibit heteroskedasticity (Rigobon (2003), Sentana and Fiorentini (2001)). However, the path of residual covariances can only be recovered from the data under specific parametric assumptions on the variance process. I propose a new identification argument that identifies the SVAR up to shock orderings using the autocovariance structure of second moments of the residuals, implied by an arbitrary stochastic process for ...
Output response to government spending: evidence from new international military spending data
Fiscal policy, among other measures, was widely used to stimulate employment and to put the U.S. economy back on track in response to the Great Recession and in a number of previous recessions in both the United States and in Europe. It is striking how much disagreement there was ? and still is ? among policymakers and academics alike about the inner workings of fiscal policy and its effect on output and employment. Estimating fiscal multipliers is methodologically challenging, as government spending often reacts to current or anticipated changes in economic conditions, and requires bold ...