DP7840 Fiscal Foresight and the Effects of Goverment Spending

Author(s): Mario Forni, Luca Gambetti
Publication Date: May 2010
Keyword(s): fiscal policy, fundamentalness, government spending shock, non-fundamentalness, sign restrictions, structural factor model
JEL(s): C32, E32, E62
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7840

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.