What are the effects of fiscal policy shocks?
Article first published online: 22 APR 2009
Copyright © 2009 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 24, Issue 6, pages 960–992, September/October 2009
How to Cite
Mountford, A. and Uhlig, H. (2009), What are the effects of fiscal policy shocks?. J. Appl. Econ., 24: 960–992. doi: 10.1002/jae.1079
- Issue published online: 23 SEP 2009
- Article first published online: 22 APR 2009
- Deutsche Forschungsgemeinschaft
We propose and apply a new approach for analyzing the effects of fiscal policy using vector autoregressions. Specifically, we use sign restrictions to identify a government revenue shock as well as a government spending shock, while controlling for a generic business cycle shock and a monetary policy shock. We explicitly allow for the possibility of announcement effects, i.e., that a current fiscal policy shock changes fiscal policy variables in the future, but not at present. We construct the impulse responses to three linear combinations of these fiscal shocks, corresponding to the three scenarios of deficit-spending, deficit-financed tax cuts and a balanced budget spending expansion. We apply the method to US quarterly data from 1955 to 2000. We find that deficit-financed tax cuts work best among these three scenarios to improve GDP, with a maximal present value multiplier of five dollars of total additional GDP per each dollar of the total cut in government revenue 5 years after the shock. Copyright © 2009 John Wiley & Sons, Ltd.