Working Paper: NBER ID: w13143
Authors: Roberto Perotti
Abstract: Most economists would agree that a hike in the federal funds rate will cause some slowdown in growth and inflation, and that the bulk of the empirical evidence is consistent with this statement. But perfectly reasonable economists can and do disagree even on the basic effects of a shock to government spending on goods and services: neoclassical models predict that private consumption and the real wage will fall, while some neo-keyenesian models predict the opposite. This paper discusses alternative time series methodologies to identify government spending shocks and to estimate their effects. Applying these methodologies to data from the US and three other OECD countries provides little evidence in favor of the neoclassical predictions. Using the US input-output tables, the paper then turns to industry-level evidence around two major military buildups to shed light on the effects of government spending shocks.
Keywords: Fiscal Policy; Government Spending; Consumption; Real Wages
JEL Codes: E2; E6; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government spending shock (E62) | increase in private consumption (E20) |
| government spending shock (E62) | increase in real wages (J39) |
| government spending shock (E62) | increase in private consumption (E20) |
| government spending shock (E62) | increase in real wages (J39) |