Working Paper: NBER ID: w16458
Authors: Antje Berndt; Hanno Lustig; Sevin Yeltekin
Abstract: We develop a method for identifying and quantifying the fiscal channels that help finance government spending shocks. We define fiscal shocks as surprises in defense spending and show that they are more precisely identified when defense stock data are used in addition to aggregate macroeconomic data. Our results show that in the postwar period, over 9% of the U.S. government's unanticipated spending needs were financed by a reduction in the market value of debt and more than 73% by an increase in primary surpluses. Additionally, we find that long-term debt is more effective at absorbing fiscal risk than short-term debt.
Keywords: Fiscal shocks; Government spending; Debt valuation; Surplus channel
JEL Codes: E44; E62; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fiscal shocks (E62) | increase in primary surpluses (H62) |
| fiscal shocks (E62) | reduction in market value of debt (G32) |
| long-term debt (H63) | more effective at absorbing fiscal shocks than short-term debt (E62) |
| 1% shock to defense spending growth (H56) | average 2.80 percentage point unexpected increase in current and future nondefense surplus growth (H56) |
| 1% shock to defense spending growth (H56) | innovations to real returns on government debt decrease by 0.37 basis points (E43) |