Using a rich dataset on government spending forecasts in Japan, we provide new evidence on the effects of unexpected changes in government spending when the nominal interest rate is near the zero lower bound (ZLB). The on-impact output multiplier is 1.5 in the ZLB period and 0.6 outside of it. We estimate that government spending shocks increase both private consumption and investment during the ZLB period, but crowd them out in the normal period. There is evidence that expected inflation increases more in the ZLB period than in the normal period. (JEL E21, E22, E23, E31, E43, E52, E62)

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Using panel data on military spending for 125 countries, we document new facts about the effects of changes in government purchases on the real exchange rate, consumption, and current accounts in both advanced and developing countries. While an increase in government purchases causes real exchange rates to appreciate and increases consumption significantly in developing countries, it causes real exchange rates to depreciate and decreases consumption in advanced countries. The current account deteriorates in both groups of countries. These findings are not consistent with standard international business-cycle models. We investigate whether the difference between advanced economies and developing countries in the responses of real exchange rates to spending shocks can be explained by alternative hypotheses. Terms of use: Documents in EconStor may JEL Classifications: E3, F3, F4

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. ii Terms of use: Documents in EconStor may AbstractUsing a novel data set for 17 countries dating from 1900 to 2013, we characterize business cycles in both small developed and developing countries in a model with financial frictions and a common shock structure. We estimate the model jointly for these 17 countries using Bayesian methods. We find that financial frictions are an important feature for not only developing countries but also small developed countries. Furthermore, business cycles in both groups of countries are marked with trend productivity shocks. Non-Technical Summary Motivation and QuestionBusiness cycles in emerging economies are marked with highly volatile consumption and countercyclical trade balance. There are two views in the literature to explain these features: Aguiar and Gopinath (2007) argue that business cycles in emerging economies can be well explained by a frictionless real business cycle model with shocks to trend productivity, reflecting frequent regime switches in economic policies and market failures in emerging economies. In contrast, Garcia-Cicco et al. (2010) argue that a model with financial frictions can better capture the dynamics of emerging economies and in that case trend shocks are not necessary. Given these contrasting views, we characterize the important features of business cycles in developing countries and compare with those in advanced countries using long historical data for 17 small open economies. MethodologyWe build a small open economy real business cycle model with reduced-form financial frictions and trend productivity shocks augmented with common shocks. We estimate the model using Bayesian methods jointly for 17 countries between 1900 and 2013. Key ContributionsWe make three contributions to the literature. First, we collect a new data set of macroeconomic variables covering 17 small open economies, for both advanced and developing countries between 1900 and 2013. This is motivated by the fact that most of the previous studies rely on only a few countries' data. Furthermore, while it is important to use long data to identify trend shocks, except for Garcia-Cicco et al. (2010), previous papers use relatively short data due to the limitation of public data, especially for emerging economies. Second, we estimate a model that nests two important features in the literature-trend productivity shocks and financial frictions-to quantify the importance of these two features. Third, we augment the model wi...

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