NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

In Search of the Transmission Mechanism of Fiscal Policy

Roberto Perotti

NBER Working Paper No. 13143
Issued in June 2007
NBER Program(s):   IFM   EFG   PE

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.

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Document Object Identifier (DOI): 10.3386/w13143

Published: In Search of the Transmission Mechanism of Fiscal Policy, Roberto Perotti. in NBER Macroeconomics Annual 2007, Volume 22, Acemoglu, Rogoff, and Woodford. 2008

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