What are the Effects of Fiscal Policy Shocks?

Andrew Mountford and Harald Uhlig ()

No 14551, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose and apply a new approach for analyzing the effects of fiscal policy using vector autoregressions. Specifically, we use sign restrictions to identify a government revenue shock as well as a government spending shock, while controlling for a generic business cycle shock and a monetary policy shock. We explicitly allow for the possibility of announcement effects, i.e., that a current fiscal policy shock changes fiscal policy variables in the future, but not at present. We construct the impulse responses to three linear combinations of these fiscal shocks, corresponding to the three scenarios of deficit-spending, deficit-financed tax cuts and a balanced budget spending expansion. We apply the method to US quarterly data from 1955-2000. We find that deficit-financed tax cuts work best among these three scenarios to improve GDP, with a maximal present value multiplier of five dollars of total additional GDP per each dollar of the total cut in government revenue five years after the shock.

JEL-codes: C32 E60 E62 H20 H50 H60 (search for similar items in EconPapers)
Date: 2008-12
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (77)

Published as Andrew Mountford & Harald Uhlig, 2009. "What are the effects of fiscal policy shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 960-992.

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Related works:
Journal Article: What are the effects of fiscal policy shocks? (2009)
Working Paper: What are the Effects of Fiscal Policy Shocks? (2002)
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