The effects of a government expenditure shock

Abstract

An econometric strategy to identify a pre-announced fiscal policy shock is proposed. I show that the reduced form innovations can be recovered by estimating a Vector-moving-average model using the Kalman filter. The structural effects are identified exploiting the shock’s pre-announced nature, which leads to potentially different signs of the responses of some endogenous variables during the announcement and after the realization of the shock. I illustrate my strategy by identifying a pre-announced shock to government consumption expenditures. I find that the response of private consumption is significantly negative on impact, rises and becomes significantly positive two quarters after the realization of the policy shock.

Citation

Kriwoluzky, Alexander (2012). “The effects of a government expenditure shock.” European Economic Review 56(3): 373–388.

@article{KRIWOLUZKY2012,
title = {Pre-announcement and timing: The effects of a government expenditure shock},
author = {Alexander Kriwoluzky},
journal = {European Economic Review},
volume = {56},
number = {3},
pages = {373-388},
year = {2012},
issn = {0014-2921},
doi = {https://doi.org/10.1016/j.euroecorev.2011.10.005},
keywords = {Fiscal policy, Fiscal foresight, Vector Autoregressive Moving Average Process},
}