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Macroeconomic Effects of Government Spending: The Great Recession Was (Really) Different

Discussion Papers 1754, 27 S., XI

Mathias Klein, Ludger Linnemann

2018

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Published in: Journal of Money Credit and Banking 51 (2019), 5

Abstract

We estimate the effect of government spending shocks on the US economy with a time-varying parameter vector autoregression. The recent Great Recession period appears to be characterized by uniquely large impulse responses of output to fiscal shocks. Moreover, the particularity of this period is underlined by highly unusual responses of several other variables. The pattern of fiscal shock responses neither completely fits the predictions of the New Keynesian model of an economy subject to the zero lower bound on nominal interest rates, nor does it suggest regular variation of fiscal policy effects depending on the state of the business cycle. Rather, the Great Recession period seems special in that government spending shocks had a strongly negative effect on the spread between corporate and government bond yields and a strongly positive effect on consumer confidence and private consumption spending.

Topics: Business cycles



JEL-Classification: E32;E62
Keywords: Fiscal policy, government spending, vector autoregression, time-varying parameters
Frei zugängliche Version: (econstor)
http://hdl.handle.net/10419/182225

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