Fiscal Foresight and the Effects of Government Spending

  • Authors: Luca Gambetti.
  • BSE Working Paper: 112338 | September 15
  • Keywords: sign restrictions , Structural factormodel , fiscalpolicy , government spending shock , fundamentalness , non-fundamentalness
  • JEL codes: C32, E32, E62
  • sign restrictions
  • Structural factormodel
  • fiscalpolicy
  • government spending shock
  • fundamentalness
  • non-fundamentalness
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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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