TY  - JOUR
AU  - Ramey,Valerie A.
TI  - Identifying Government Spending Shocks: It's All in the Timing
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15464
PY  - 2009
Y2  - October 2009
UR  - http://www.nber.org/papers/w15464
L1  - http://www.nber.org/papers/w15464.pdf
N1  - Author contact info:
Valerie A. Ramey
Department of Economics, 0508
University of California, San Diego
9500 Gilman Drive
La Jolla, CA 92093-0508
Tel: 858/534-2388
Fax: 858/534-7040
E-Mail: VRAMEY@UCSD.EDU
AB  - Do shocks to government spending raise or lower consumption and real wages?  Standard VAR identification approaches show a rise in these variables, whereas the Ramey-Shapiro narrative identification approach finds a fall.   I show that a key difference in the approaches is the timing.  Both professional forecasts and the narrative approach shocks Granger-cause the VAR shocks, implying that the VAR shocks are missing the timing of the news.  Simulations from a standard neoclassical model in which government spending is anticipated by several quarters demonstrate that VARs estimated with faulty timing can produce a rise in consumption even when it decreases in the model.   Motivated by the importance of measuring anticipations, I construct two new variables that measure anticipations.  The first is based on narrative evidence that is much richer than the Ramey-Shapiro military dates and covers 1939 to 2008.  The second is from the Survey of Professional Forecasters, and covers the period 1969 to 2008.  All news measures suggest that most components of consumption fall after a positive shock to government spending.  The implied government spending multipliers range from 0.6 to 1.1.
ER  -