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.