Working Paper: CEPR ID: DP2760
Authors: Antonio Fatas; Ilian Mihov
Abstract: This Paper compares the dynamic impact of fiscal policy on macroeconomic variables implied by a large class of general equilibrium models with the empirical results from an identified vector autoregression. In the data we find that positive innovations in government spending are followed by strong and persistent increases in consumption and employment. The effects are particularly pronounced when government wage expenditures increase. We compare these findings to several variations of a standard real business cycle model and we find that the positive correlation in the responses of employment and consumption cannot be matched by the model under plausible assumptions for the values of the calibration parameters.
Keywords: Business Cycles; Fiscal Policy
JEL Codes: E20; E30; H30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive innovations in government spending (H59) | Increase in consumption (E21) |
| Positive innovations in government spending (H59) | Increase in employment (J23) |
| Increase in government wage expenditures (H59) | Strong and pronounced effects on consumption (E21) |
| Increase in government wage expenditures (H59) | Strong and pronounced effects on employment (J68) |
| Government spending shocks (E62) | Rise in consumption (D12) |
| Government spending shocks (E62) | Rise in employment (J23) |
| Expansion in private output following government spending (H59) | Driven by increase in consumption (E20) |
| Positive correlation between employment and consumption (E27) | Challenges RBC framework (R50) |