Working Paper: CEPR ID: DP17134
Authors: Atsushi Inoue; Barbara Rossi; Yiru Wang
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
JEL Codes: C22; C26; C32; C36; C53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government spending (H59) | GDP (E20) |
| fiscal policy shocks (E62) | government spending (H59) |
| fiscal policy shocks (E62) | GDP (E20) |
| level of government debt (H63) | fiscal multiplier (E62) |
| state of the economy (E66) | fiscal multiplier (E62) |
| fiscal shocks (E62) | variations in multipliers (C39) |