Estimating Fiscal Multipliers: News from a Nonlinear World

Abstract

We estimate nonlinear VARs to assess to what extent Öscal spending multipliers are countercyclical in the United States. We deal with the issue of nonfundamentalness due to Öscal foresight by appealing to sums of revisions of expectations of Öscal expenditures. This measure of anticipated Öscal shocks is shown to carry valuable information of future dynamics of public spending. Results based on generalized impulse responses suggest that Öscal spending multipliers in recessions are greater than one, but not statistically larger than in expansions. However, nonlinearities arise when focusing on deep recessions vs. strong expansionary periods.

Fiscal multipliers in a structural VEC model with mixed normal errors

“…Fatás and Mihov (2001) and Caldara and Kamps (2008) include …ve variables in their baseline speci…cation but both order the key variables government expenditure (G t ), GDP (Y t ) and government revenue, or taxes net of transfers (T t ) in the vector y t as y t = (G t ; Y t ; T t ), while Auerbach and Gorodnichenko (2012) and Caggiano et al (2015) use the ordering y t = (G t ; T t ; Y t ). The Fatás and Mihov (2001) ordering implies the relations…”

“…The variables are constructed using the Bureau of Economic Analysis'NIPA Tables. 5 To deal with …scal foresight, we follow Caggiano et al (2015) and include a fourth variable in the VAR, a so-called public expenditure news variable g 13 . As the variable g 13 is constructed from the forecast revisions of the growth rate of real government expenditure, collected by the Survey of Professional Forecasters (SPF) since 1981Q3, the whole sample is restricted to the period 1981Q3-2013Q1.…”

“…As the variable g 13 is constructed from the forecast revisions of the growth rate of real government expenditure, collected by the Survey of Professional Forecasters (SPF) since 1981Q3, the whole sample is restricted to the period 1981Q3-2013Q1. 6 The cumulated …scal news variable is constructed by summing up revisions of expectations as follows (Caggiano et al 2015, Gambetti 2012):…”

“…whether government …scal stimulus is more e¤ective when it is used to supplement scant private demand in an economic downturn than in an upturn (Auerbach & Gorodnichenko 2012, Caggiano, Castelnuovo, Colombo & Nodari, 2015. Interestingly Caggiano et al (2015) show that this indeed is the case with deep recessions and extreme economic peaks in the US, while no statistically signi…cant di¤erences between normal times, i.e.…”

“…The data cover the period 1981Q3 to 2012Q4 and were previously used by Caggiano et al (2015), as well as Auerbach and Gorodnichenko (2012). Similarly to Caggiano et al (2015), …scal policy anticipation e¤ects, or foresight are addressed by including the …scal news variable proposed by Gambetti (2012).…”