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2018 | OriginalPaper | Buchkapitel

3. The Macroeconomic Effects of Fiscal Policy Shocks: A Review of the Literature

verfasst von : Antonella Cavallo, Pietro Dallari, Antonio Ribba

Erschienen in: Fiscal Policies in High Debt Euro-Area Countries

Verlag: Springer International Publishing

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Abstract

In this chapter we provide a review of the literature using multivariate time series techniques, and in particular structural VARs and panel VARs, to study the effects of fiscal policy shocks on macroeconomic variables. In the last decades the traditional Keynesian view on fiscal policy as a useful tool for macroeconomic stabilization has been challenged on the ground of possible expansionary effects associated with fiscal consolidations. However, as will be seen, recent research shows heterogeneous results. It seems possible at this stage to identify an emerging consensus, related to the conclusion that the size of fiscal multipliers, i.e. the size of the response of output to exogenous changes in government expenditures or revenues, is significantly affected by some selected macroeconomic factors. Among these factors, country financial conditions are particularly relevant in the context of the present research, since they are closely related to the levels of public and private indebtedness as measured by debt-to-GDP ratios.

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Fußnoten
1
The United States launched a large fiscal stimulus package over the period 2008–2010 of about 5 percent of domestic GDP (cf. OECD 2009).
 
2
In order to estimate the impact of the fiscal stimulus, Blinder and Zandi used Moody’s Analytics model.
 
3
Cogan et al. (2010) base their estimations of fiscal multipliers on the New Keynesian model developed for the US economy by Smets and Wouters (2007).
 
4
By also including studies that produce separate estimations of fiscal multipliers in recessions and espansions, the variability increases. For example, in Auerbach and Gorodnichenko (2012) the spending multipliers may vary from (around) zero to 3.6.
 
5
Some examples of linear rules related to the conduct of monetary policy are given in Christiano et al. (1999). The authors review the research on monetary policy shocks in the previous decades.
 
6
Beside the structural VAR approach to measure monetary policy, another large body of research has been devoted to modeling the central bank’s “reaction function”, i.e. estimating structural equations describing the systematic component of monetary policy. Following the seminal work of Taylor (1993), structural equations models have developed to analyze the systematic response of the nominal interest rate to changes in a small set of macroeconomic variables. The set of variables usually includes at least a measure of aggregate economic activity, such as the output gap, and a measure of inflation. See e.g. Clarida et al. (1998).
 
7
A comprehensive survey of the literature on macroeconomic shocks, also including fiscal shocks, and their propagation mechanisms has recently been provided by Ramey (2016).
 
8
In order to simplify the notation, we omit constants and other deterministic components.
 
9
See, among others, Sims (1986) and Bernanke (1986).
 
10
VAR models and identification of structural shocks are extensively treated in Canova (2007, Chap. 5). An important point stressed by Canova is that rank and order condition cannot rule out the possibility that more theoretical models are consistent with the estimated set of error terms. In other words, if rank and order condition are satisfied then we have local identification.
 
11
The price puzzle is an age-old plague affecting VAR models aiming to study the dynamic effects of monetary policy shocks on nominal and real variables. The puzzle consists in the wrong sign in the response of prices to a monetary policy shock. In particular, it affects VARs in which shocks are identified by imposing contemporaneous, causal zero restrictions. See e.g. Christiano et al. (1999).
 
12
In the article, an economy is classified as “open” if the ratio of import plus export to GDP is greater than 60 percent. This criterion leads to the separation of 28 open from 16 closed countries. Of course, it should be noted that these classifications suffer, unavoidably, from some degree of arbitrariness.
 
13
In this article Friedman proposed the notion of natural rate of unemployment, explicitly inspired by the Wicksellian notion of natural rate of interest. The main argument is that if the central bank keeps the interest rate below the long-run equilibrium rate, i.e. the natural rate, in an attempt to reduce an undesidered high level of unemployment, will lose control of inflation.
 
14
The chancellor Gordon Brown (Brown 1997) proposed to amend the Bank of England Act 1946 and to attribute independence to the Bank. “The New Monetary Policy Framework” (1997) in establishing objectives for the central bank stated that: “Price stability is a precondition for high and stable levels of growth and employment”.
 
15
The difficulties in interpreting structural VARs when agents have rational expectations, i.e. the problem of non-fundamentalness, were first discussed in Hansen and Sargent (1991). Another important example of non-fundamental representation was presented in Lippi and Reichlin (1993), in the context of structural VARs identified by imposing long-run restrictions (cf. Blanchard and Quah 1989). Lippi and Reichlin showed that a non-fundamental representation may be generated in the presence of particular diffusion processes of technological innovations.
 
16
However, it is worth observing that the unreliability of fiscal multiplier estimations based on the structural VAR methodology rests mainly on the assumption of rational and intertemporally optimizing agents who can discount future fiscal obligations. More likely, only a small part of the families are able to discount such future fiscal obligations. In other words, the majority of agents follows a simpler rule of thumb rather than complicated intertemporally optimizing plans. As a consequence, it is possible that critiques of VAR identification of fiscal shocks are overestimated.
 
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Metadaten
Titel
The Macroeconomic Effects of Fiscal Policy Shocks: A Review of the Literature
verfasst von
Antonella Cavallo
Pietro Dallari
Antonio Ribba
Copyright-Jahr
2018
DOI
https://doi.org/10.1007/978-3-319-70269-8_3