Government purchases reloaded: Informational insufficiency and heterogeneity in fiscal VARs

Abstract

Using a large Bayesian VAR, we approximate the flow of information received by economic agents to investigate the effects of changes to government purchases. We document robust evidence that informational insufficiency in conventional models explains inconsistent results across samples and commonly employed identifications in recursive Structural VARs and Expectational VARs. Furthermore, we report heterogeneous effects of components of government purchases. While aggregate government purchases do not appear to produce strong stimulative effects with output multiplier around 0.7, government investment components have multipliers well above unity. State and local consumption, which captures investment in education and health, elicits a strong response.JEL classification: C32, E32, E62.

125 ​Years of time-varying effects of fiscal policy on financial markets

“…And lastly, the shocks are constructed independently from the news sources and, hence, are less sensitive to measurement error (Ramey and Zubairy, 2018). A more detailed discussion of these issues appears in Ellahie and Ricco (2017). .…”

The response of asset prices to monetary policy shocks: Stronger than thought

“…See, for example,Hansen and Sargent (1991), Reichlin (1993, 1994), and Fernández-Villaverde,Rubio-Ramírez, Sargent, and Watson (2007) for early contributions; Gambetti (2010, 2014), E. R.Sims (2012), Forni, Gambetti, andSala (2014),Ellahie and Ricco (2017), andCanova and Hamidi Sahneh (2017) for more recent papers; and Alessi,Barigozzi, and Capasso (2011) for a review of the literature. 3 AsBarigozzi, Lippi, and Luciani (2016b) point out, differencing the data by construction leads all common shocks to have permanent effects.…”

Estimating Fiscal Multipliers: News from a Non‐linear World

“…Empirical evidence in favour of state-dependent fiscal multipliers is provided by, among others, Tagkalakis (2008), Gorodnichenko (2012, 2013a,b), Bachmann and Sims (2012), Batini et al (2012), Baum et al (2012), Mittnik and Semmler (2012), Fazzari et al (2014). 1 Second, anticipation effects are likely to be of great relevance to the transmission of fiscal policy shocks, a phenomenon often referred to as 'fiscal foresight' (see, among others, Yang, 2005;Fisher and Peters, 2010;Mertens and Ravn, 2011;Ramey, 2011b;Favero and Giavazzi, 2012;Kriwoluzky, 2012;Ellahie and Ricco, 2013;Leeper et al, 2013;Forni and Gambetti, 2014a). Modelling a standard set of US variables with a medium-scale structural model that allows for foresight up to eight quarters, Schmitt-Grohe and Uribe (2012) find that about 60% of the variance of government spending is due to anticipated shocks.…”