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.
Forni, M. e L., Gambetti. "Fiscal Foresight and the Effects of Government Spending" Working paper, RECENT WORKING PAPER SERIES, Dipartimento di Economia Marco Biagi – Università di Modena e Reggio Emilia, 2010.
Fiscal Foresight and the Effects of Government Spending
Forni, M.;Gambetti, L.
2010
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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