Discussion paper

DP7840 Fiscal Foresight and the Effects of Goverment Spending

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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Citation

Forni, M and L Gambetti (2010), ‘DP7840 Fiscal Foresight and the Effects of Goverment Spending‘, CEPR Discussion Paper No. 7840. CEPR Press, Paris & London. https://cepr.org/publications/dp7840