Local Projections in Unstable Environments: How Effective is Fiscal Policy?

Atsushi Inoue, Barbara Rossi and Yiru Wang

No 17134, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The paper develops a local projection estimator for estimating impulse responses in the presence of time variation. Importantly, we allow local instabilities in both slope coefficients and variances. Monte Carlo simulations illustrate that the method performs well in practice. Using our proposed estimator, we shed new light on the effects of fiscal policy shocks and the size of government spending multipliers. Our analysis uncovers the existence of instabilities that were unaccounted for in previous studies, and links time variation in the multipliers to the size of government debt.

Keywords: Time variation; Local projections; Instability; Path estimator; Weighted average risk; Fiscal policy; Fiscal multiplier; Monetary policy; Government spending (search for similar items in EconPapers)
JEL-codes: C22 C26 C32 C36 C53 (search for similar items in EconPapers)
Date: 2022-03
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