DP7423 Measuring the Impact of Fiscal Policy in the Face of Anticipation: A Structural VAR Approach

Author(s): Karel Mertens, Morten O Ravn
Publication Date: August 2009
Keyword(s): anticipation effects, fiscal policy, structural vector autoregressions
JEL(s): C32, E20, E32, E62
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7423

Empirical estimates of the impact of government spending shocks disagree on central issues such as the size of output multipliers and the responses of consumption and the real wage. One explanation for the disagreement is that fiscal shocks are often anticipated. Due to misspecification of the information set, anticipation effects may invalidate SVAR estimates of impulse responses. We use economic theory to derive a fiscal SVAR estimator that is applicable when fiscal shocks are anticipated. We study its properties and apply it to US data. We fail to find evidence that anticipation effects overturn the existing findings from the fiscal SVAR literature.