The Effects of Government Spending on the Distribution of Consumption

• Authors: Luca Gambetti and Giacomo De Giorgi.
• BSE Working Paper: 110132 | September 15
• Keywords: Policy regime change , Tims-varying coefficients VAR , Parameter identification , Fiscal policy rules , Countercyclical fiscal policy
• JEL codes: C32, E62
• Policy regime change
• Tims-varying coefficients VAR
• Parameter identification
• Fiscal policy rules
• Countercyclical fiscal policy

This paper proposes an empirical framework to study the effects of a policy regime change defined as an unpredictable and permanent change in the policy parameters. In particular I show how to make conditional forecast and perform impulse response functions and counterfactual analysis. As an application, the effects of changes in fiscal policy rules in the US are investigated. I find that discretionary fiscal policy has become more countercyclical over the last decades. In absence of such a change, surplus would have been higher, debt lower and output gap more volatile but only until mid 80s. An increase in the degree of counter-cyclicality of fiscal policy has a positive effect on output gap in periods where the level of debt-to-GDP ratio is low and a zero or negative effect when the ratio is high. This explains why a more countercylical stance of the systematic fiscal policy taking place in 2008:II is predicted to be rather ineffective for recovering from the crisis.