Effects Of Government Spending Shocks Research Articles

HOUSEHOLD DEBT AND THE EFFECTS OF FISCAL POLICY

AbstractWe examine how the effects of government spending shocks depend on the balance sheet position of households. Employing U.S. household survey data, we find a large, positive consumption response for households with mortgage debt, smaller response for renters, and an insignificant response for outright homeowners, in response to a positive government spending shock. We consider a model with three types of households and show that it can successfully account for these findings. Liquidity constraints and wealth effects play a crucial role in shock propagation. Our findings suggest the importance of household mortgage debt position in the transmission mechanism of fiscal policy.

The macroeconomic effects of government spending shocks in New Zealand

ABSTRACT This paper estimates the macroeconomic effects of government spending shocks in New Zealand. Using a structural vector autoregression (SVAR) model, I find small output multipliers for government consumption but large multipliers for government investment. Importantly, the real exchange rate appreciates after positive government spending shocks, consistent with classic theory. Private consumption and private investment decrease after government consumption shocks, but increase after government investment shocks. I compare my results to the previous studies and show that selecting the appropriate series for government investment is important for estimating its effect.

Government spending and credit market: Evidence from Italian (NUTS 3) provinces

AbstractThis study examines the effects of government spending shocks on the Italian credit market using NUTS 3 data over the sample period 2011–2018. The empirical methodology is based on a local projection IV and the identification of a public spending shock is achieved by constructing a Bartik instrument. The empirical evidence shows a mild positive effect of 1% increase in government spending relative to GDP on the growth of the volume loans relative to GDP. However, the empirical findings show that government spending does not help to ameliorate neither the “size bias,” that is the financial constraints which small firms face relative to larger ones, nor the “home bias” in lending related to the process of bank consolidation in Italy.

Effects of Government Spending Shocks by Household Indebtedness: An OECD Panel Analysis

Effects of Government Spending Shocks by Household Indebtedness: An OECD Panel Analysis

Macroeconomic effects of government spending shocks: New narrative evidence from Canada

This paper examines the macroeconomic effects of government spending shocks in Canada for the period of 1949–2012. We construct a novel measure of news about exogenous government spending changes identified through the narrative approach. We use government documents, mostly the budget speech, to identify the size, timing, and principal motivation for all planned major federal government spending changes. To achieve identification, we consider those changes that are unrelated to the contemporaneous movements in the economy. The implied government spending multiplier estimates using our exogenous government spending news series are between 1.08 and 1.69.

Keeping up with the Joneses and the consumption response to government spending

A key empirical regularity regrading the effect of fiscal policy is that private consumption tends to increase in response to a hike in government spending. In this paper, we provide an explanation for this stylized fact based on the notion of Keeping Up with the Joneses (KUJ), another empirical observation well documented in the literature. • We study the effects of government spending shocks on private consumption in the presence of consumption externalities. • We show that keeping up with the Joneses is a necessary condition to generate positive consumption multipliers. • We derive the necessary and sufficient conditions in the static model under which positive consumption multipliers arise. • We provide numerical examples in static and dynamic models for the crowd-in effect of government spending on consumption.

The State-Level Nonlinear Effects of Government Spending Shocks in the US: The Role of Partisan Conflict

Utilising a nonlinear (regime-switching) mixed-frequency panel vector autoregression model, we study the effects of government spending shocks in the United States (US) over the business cycle, while considering the role of partisan conflict. In particular, we investigate whether partisan conflict is relevant to the differences in fiscal spending multipliers in expansionary and recessionary business cycle phases upon the impact of annual government spending shocks, using quarterly state-level data covering 1950:Q1 to 2016:Q4. We find new evidence that fiscal multipliers can vary with economic and political conditions. The cumulated effects of government spending shocks are strong and persistent in recessions when the level of partisan conflict is low.

The distributional effects of government spending shocks in developing economies

AbstractWe construct unanticipated government spending shocks for 103 developing countries from 1990 to 2015 and study their effects on income distribution. We find that unanticipated fiscal consolidations lead to a long‐lasting increase in income inequality, while fiscal expansions lower inequality. The results are robust to several measures of income distribution and size of the fiscal shocks, to an alternative identification strategy, across expansions and recessions and across country groups (low‐income countries vs. emerging markets). An additional contribution of the paper is the computation of the medium‐terminequality multiplier. This is on average about 1 in our sample, meaning that a cumulative decrease in government spending of 1% of gross domestic product over 5 years is associated with a cumulative increase in the Gini coefficient over the same period of about 1 percentage point. The multiplier is larger for total government expenditure than for public investment and consumption (with the former having larger effect), likely due to the redistributive role of transfers. Finally, we find that (unanticipated) fiscal consolidations lead to an increase in poverty.

Government spending multipliers in (un)certain times

We estimate the dynamic effects of government spending shocks, using time-varying volatility in US data modeled through a Markov switching process. We find that the average government spending multiplier is significantly and persistently above one, driven by a crowding-in of private consumption and non-residential investment. We rationalize the results empirically through a contemporaneously countercyclical response of government spending and an efficient weighting of observations inversely to their error variance. We then show that the multiplier is significantly smaller when volatility is high, consistent with theories predicting reduced effectiveness of fiscal interventions in uncertain times.

Questioning the puzzle: Fiscal policy, real exchange rate and inflation

The paper re-investigates the effects of government spending shocks on the real exchange rate and inflation, using US data. In opposition to some previous puzzling results, we find that an increase in government spending appreciates the real exchange rate and generates inflationary pressures. Positive spending shocks also induce a trade balance deficit and an increase in the nominal interest rate. The discrepancy with the existing literature lies in the identification of fiscal shocks: embedding a narrative instrument within a proxy-SVAR model is what makes the difference. Findings are robust and coherent with a standard open economy business cycle model. Our analysis suggests that proxy-SVAR models are more immune to structural changes in US fiscal policy.

Uncertainty and nonlinear macroeconomic effects of fiscal policy in the US: a SEIVAR-based analysis

PurposeThe purpose of this paper is to investigate whether the macroeconomic effects of government spending shocks vary with the degree of macroeconomic uncertainty.Design/methodology/approachThe authors use quarterly US data from 1960 to 2017 and employ the Self-Exciting Interacted VAR (SEIVAR) to compute nonlinear generalized impulse response functions (GIRFs) to an orthogonalized government spending shock during tranquil and in uncertain times. The parsimonious design of the SEIVAR enables us to focus on extreme deciles of the uncertainty distribution and to control for the financing side of the government budget, monetary policy, financial frictions and consumer confidence.FindingsFiscal spending has positive output effects in tranquil times, but is contractionary during times of heightened macroeconomic uncertainty. The results indicate an important role of the endogenous response of macroeconomic uncertainty. Investigating different government spending purposes, only increases in research and development expenditures reduce uncertainty and boost output during uncertain times.Originality/valueThe authors contribute to the literature in using a method which allows to control for a large set of confounding factors and accounts for the uncertainty response.

The effects of government spending shocks on income distribution in South Africa

PurposeThe main aim of this study is to examine the effect of government spending and its components' shocks on the distribution of income between labour and capital in South Africa for the period between 1994Q2 and 2019Q3.Design/methodology/approachThe effects of government spending shocks on income distribution are analysed using Jordà's (2005) local projection method. The shocks, however, are identified by applying short-run contemporaneous restrictions in a vector autoregressive model based on Cholesky identification scheme.FindingsThe results indicate that government spending shock has a positive and significant effect on labour share after the first quarter. This means that expansionary government spending has a paramount role in reducing income inequality in the economy. Both government investment and government consumption shocks have also contributed to a reduction in income inequality, though the magnitude effect is smaller for government consumption.Originality/valueResearch findings on the effects of government spending shock on income inequality are still inconclusive. Therefore, this research examines the effect of total government spending shock along with its components on labour income share for the South African economy.

The effects of government spending shocks on real exchange rate in Ethiopia

PurposeGovernment spending has inconclusive effect on real exchange rate. From the very beginning neoclassical economists argued that a rise in government spending brings depreciation in real exchange rate while neo-Keynesians claimed that government spending appreciates real exchange rate. Hence, the main purpose of this paper is to examine the effect of government spending shock and its components' shocks, namely government consumption and government investment on real exchange rate over the period 2001Q1–2016Q1 for Ethiopia.Design/methodology/approachTo examine the effects of government spending shocks on real exchange rate, Jordà's (2005) local projection method is employed in this study. The exogenous shocks, however, are identified recursively in a vector autoregressive model.FindingsThe impulse responses show that government spending shock leads to a statistically significant appreciation of real exchange rate in Ethiopia. This evidence supports the neo-Keynesian school of thought who predicts an appreciation of real exchange rate from a rise in government spending. While government investment shock depreciates real exchange rate on impact insignificantly, government consumption shock appreciates real exchange rate in this small open economy.Originality/valueThis research contributes to the scarce literature on the effect of fiscal policy shock on real exchange rate in small open economies like Ethiopia.

Questioning the Puzzle: Fiscal Policy, Real Exchange Rate and Inflation

The paper re-investigates the effects of government spending shocks on the real exchange rate and inflation, using US data. In opposition to some previous puzzling results, we find that an increase in government spending appreciates the real exchange rate and generates inflationary pressures. Positive spending shocks also induce a trade balance deficit and an increase in the nominal interest rate. The discrepancy with the existing literature lies in the identification of fiscal shocks: embedding a narrative instrument within a proxy-SVAR model is what makes the difference. Findings are robust and coherent with a standard open economy business cycle model. Our analysis suggests that proxy-SVAR models are more immune to structural changes in US fiscal policy.

Nonlinear effects of government spending shocks in the USA: Evidence from state‐level data

SummaryThis paper uses state‐level data to estimate the effect of government spending shocks during expansions and recessions. By employing a mixed‐frequency framework, we are able to include a long span of annual state‐level government spending data in our nonlinear quarterly panel VAR model. We find evidence that for the average state the fiscal multiplier is larger during recessions. However, there is substantial heterogeneity across the cross‐section. The degree of nonlinearity in the effect of spending shocks is larger in states that are subject to a higher degree of financial frictions. In contrast, states with a prevalence of manufacturing, mining and agricultural industries tend to have multipliers that are more similar across business cycle phases.

Fiscal Space and the Size of the Fiscal Multiplier

This paper investigates the interaction between fiscal policy transmission and fiscal sustainability, captured through the concept of fiscal space. In order to measure the evolution of fiscal space over time we propose four indicators, drawing from different concepts available in the literature. We use these indicators to define periods of ample and tight fiscal space. We then estimate the effects of government spending shocks in the United States according to the level of fiscal space, for the period 1929:Q1-2015:Q4. The main result of the paper is that fiscal multiplier is above one when fiscal space is ample, while it is below one when fiscal space is tight. Moreover, such difference is always significant. This result is very robust across different identification methods and samples.

Government Spending Shocks and External Competitiveness: Evidence from South Africa

This study examines the effects of government spending shocks on real effective exchange rate in South Africa over the period 1970Q1–2019Q2. In doing so, a version of vector autoregressive impulse response model developed by Jordà is employed and the shocks are identified recursively. The impulse responses show that government spending shock has a significant appreciation effect on real effective exchange rate and its effect depends on the nature of the fiscal shock. Although the effect of government spending on real effective exchange rate does not depend on the sign of the shock, it varies over economic cycle.

THE EFFECTS OF FISCAL POLICY AT THE EFFECTIVE LOWER BOUND

We estimate the effects of government spending shocks during prolonged episodes of low interest rates, which we consider as proxy for the effective lower bound (ELB). Using a panel VAR model for 17 advanced countries, we find that both the government consumption and investment multipliers are significantly higher, and exceed unity, when interest rates are persistently low. Distinguishing between construction- and equipment-related government investments, we find that only the former raises output by significantly more when the ELB binds. This result can be explained by existing New Keynesian models featuring time-to-build constraints on government investment.

GOVERNMENT SPENDING MULTIPLIERS IN GOOD TIMES AND BAD TIMES: THE CASE OF EMERGING MARKETS

We investigate the presence of nonlinear effects of government spending shocks during good and bad times in a panel of 17 emerging markets through the lens of a Bayesian panel threshold VAR model. We find that the responses of gross domestic product, consumption, investment, trade balance, real exchange rate, and real interest rates vary depending on the state of the economy. Particularly, in slump periods, both consumption and investment may respond negatively to a government purchase stimulus, unlike in normal times. Our estimated government spending multipliers are less than one in the two regimes and can be zero in bad times.

Exploring the Output Effect of Fiscal Policy Shocks in Low Income Countries

What do we know about the output effects of fiscal policy in low income countries (LICs)? There are very few empirical studies on the subject. This paper fills this gap by estimating the output effects of government spending shocks in LICs. Our analysis—based on the local projection method—finds that the output effects in LICs are markedly lower than those in AEs and marginally smaller than those in EMs. We also find that in LICs, the output effects are larger (i) during recessions; (ii) under a fixed exchange rate regime; and/or (iii) with higher quality of institutions. Our analysis could not confirm any statistically significant output effect under floating exchange rate regimes. For the estimation of the output effects of fiscal spending shocks, it is thus important to consider the state of the economy and the country’s structural characteristics. Our results imply that the output costs of fiscal adjustment in LICs may not be as large as previously thought, especially if adopted outside of a recession, based on cutting public consumption, and accompanied by reform to enhance institutions.