Fiscal multipliers in a structural VEC model with mixed normal errors

Abstract

This paper estimates the effects of fiscal policy shocks on GDP in the United States with a vector error correction (VEC) model where shocks are identified by exploiting the nonnormal distribution of the model residuals. Unlike previous research, the model used here takes into account cointegation between the variables and identifies fiscal policy shocks without imposing any restrictions. The approach also allows statistical testing of previous identification strategies, which may help discriminate between them and hence also explain differences between various fiscal multiplier estimates. According to the results, a deficit financed government spending shock has a weak negative effect on output, whereas a tax raise to finance government spending has a positive impact on GDP. JEL Classification: C32, E62

Demand – Supply – Taxation in Times of Crisis

“…Firstly, following Blanchard and Perotti (2002) we assume that expenditure decisions are prior to tax ones. Then, following Auerbach and Gorodnichenko (2012) and Puonti (2016) we use the above -mentioned ordering in our baseline specification: government variables, GDP components, monetary policy, unemployment rate.…”