Putting Government Spending Shocks under the Microscope: Standard Vector Autoregression versus the Narrative Approach

Rong Li ()

FinanzArchiv: Public Finance Analysis, 2017, vol. 73, issue 3, 237-254

Abstract: Standard vector autoregression and the narrative approach yield contrasting responses of consumption and real wages to a government spending shock. A key difference in the approaches is the composition of identified shocks. Standard VAR features a large increase in government purchase of intermediate goods and services and investment, but a small response of government employment compensation. By contrast, the narrative approach identifies a smaller increase in intermediate goods and services purchase but a large increase in employment compensation. Furthermore, empirical evidence indicates impacts of fiscal stimulus vary considerably for different types of spending from the American Recovery and Reinvestment Act.

Keywords: government spending; standard VAR; narrative approach; ARRA (search for similar items in EconPapers)
JEL-codes: E62 H50 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4)

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DOI: 10.1628/001522117X14915570953886

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