Working Paper: CEPR ID: DP7840
Authors: Mario Forni; Luca Gambetti
Abstract: We study the effects of government spending by using a structural, large dimensional, dynamic factor model. We find that the government spending shock is non-fundamental for the variables commonly used in the structural VAR literature, so that its impulse response functions cannot be consistently estimated by means of a VAR. Government spending raises both consumption and investment, with no evidence of crowding out. The impact multiplier is 1.7 and the long run multiplier is 0.6.
Keywords: Fiscal Policy; Fundamentalness; Government Spending Shock; Non-Fundamentalness; Sign Restrictions; Structural Factor Model
JEL Codes: C32; E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government spending shocks (E62) | Consumption (E21) |
| Government spending shocks (E62) | Investment (G31) |
| Government spending shocks (E62) | Total Investment (E22) |
| Government spending shocks (E62) | Government primary deficit (H69) |
| Government spending shocks (E62) | Tax receipts (H29) |
| Government spending shocks (E62) | Output (Y10) |
| Government spending shocks (E62) | Prices (D49) |
| Government spending shocks (E62) | Granger causation test (C22) |