Three Essays on News Shocks and Fiscal Multipliers

Abstract

This thesis includes three essays on news shocks and fiscal multipliers. In the first chapter, I demonstrate that a fiscal news shock originated from an increased defence spending in the U.S. can directly transmit to Canada in the form of an induced defence spending. This paper proposes a new channel of fiscal news shock transmission from the US to Canada labelled as induced spending channel. My transmission model shows that a US defence spending news shock has a positive impact on Canadian GDP. I coin a novel multiplier labelled as international defence multiplier which can estimate the magnitude of the induced defence spending change of a country in response to the defence spending change of another country. In the second chapter, I explore whether the transfer payments to households boost private consumption spending across provinces in Canada. I propose Universal Child Care Benefit payments across provinces in Canada as an instrument for transfer payments. Universal Child Care Benefit is a formula-based transfer where the total allocation for a province depends on the total number of eligible children in that province. Therefore, Universal Child Care Benefit payments can explain exogenous variation in transfer payments as these payments vary across provinces due to the differences in demographic characteristics rather than their economic conditions. Using the Two Stage Least Square estimation method for the period 2006-2015, this paper finds the estimated local transfer multiplier of consumption in Canada to be 0.47. The third chapter assesses the role of commodity terms of trade news shocks in causing aggregate fluctuations in Canada. Movements in commodity terms of trade due to sharp price movements can lead to aggregate fluctuations in commodity exporting countries such as Canada. I demonstrate that it is important to consider the role of commodity terms of trade news shocks to explain the fluctuations in aggregate variables. This paper identifies a combination of surprise and news shocks for Canada. My findings suggest that commodity terms of trade shocks can explain substantial variation in aggregate fluctuations in Canada.