Measuring the Effect of Government Spending Shocks on Output: A Factor-Augmented VAR Approach

Philip Vinson

Public Finance Review, 2026, vol. 54, issue 2, 237-274

Abstract: Using a factor-augmented vector auto-regression model and quarterly U.S. data from 1960 to 2019, I estimate the effect of changes in government spending on key economic variables such as output and household consumption. Unlike previous studies which show a positive effect of government spending on output, I find that adding factors to the VAR model erases the positive effect of spending and reveals a small but statistically significant negative response in output and consumption. Other instances of crowding out include increases in interest rates and price levels and decreases in investment and net exports.

Keywords: Government spending; economic output; fiscal policy; stimulus; crowding out; factor-augmented vector auto-regression (FAVAR) (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:sae:pubfin:v:54:y:2026:i:2:p:237-274

DOI: 10.1177/10911421251391425

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