Fiscal Policy and Economic Activity: U.S. Evidence

K Peren Arin () and Faik Koray
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Faik Koray: Louisiana State University

Abstract: We investigate the dynamic effects of five different fiscal shocks on the US economy using a structural vector autoregressive (SVAR) model that uses Blanchard-Quah type restrictions. We find that an increase in indirect taxes or in corporate taxes has a contractionary effect on the economy, while an increase in personal taxes is neither contractionary, nor expansionary. These results imply that the Ricardian Equivalence hypothesis holds only for personal taxes. On the spending side, we find that an increase in government wages and salaries has a contractionary effect on the economy, while an increase in defense spending is expansionary. Our results suggest that different fiscal shocks have different and offsetting effects on the economy, and using aggregated data may, therefore, conceal the effects of fiscal policy.

JEL-codes: E62 H20 H30 (search for similar items in EconPapers)
Date: Written 2005-08-22
Note: Type of Document - pdf
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http://129.3.20.41/eps/mac/papers/0508/0508024.pdf (application/pdf)

Related works:
Working Paper: FISCAL POLICY AND ECONOMIC ACTIVITY: US EVIDENCE (2005)
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