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Discussion Paper Details

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Title: Fiscal Foresight and the Effects of Goverment Spending

Author(s): Mario Forni and Luca Gambetti

Publication Date: May 2010

Keyword(s): fiscal policy, fundamentalness, government spending shock, non-fundamentalness, sign restrictions and structural factor model

Programme Area(s): International Macroeconomics

Abstract: We study the effects of government spending by using a structural, large dimensional, dynamic factor model. We find that the government spending shock is non-fundamental for the variables commonly used in the structural VAR literature, so that its impulse response functions cannot be consistently estimated by means of a VAR. Government spending raises both consumption and investment, with no evidence of crowding out. The impact multiplier is 1.7 and the long run multiplier is 0.6.

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Bibliographic Reference

Forni, M and Gambetti, L. 2010. 'Fiscal Foresight and the Effects of Goverment Spending'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7840