How Does the U.S. Government Finance Fiscal Shocks?
We develop a method for identifying and quantifying the fiscal channels that help finance government spending shocks. We define fiscal shocks as surprises in defense spending and show that they are more precisely identified when defense stock data are used in addition to aggregate macroeconomic data. Our results show that in the postwar period, over 9% of the U.S. government's unanticipated spending needs were financed by a reduction in the market value of debt and more than 73% by an increase in primary surpluses. Additionally, we find that long-term debt is more effective at absorbing fiscal risk than short-term debt.
We would like to thank seminar participants at the Federal Reserve Bank of Chicago, Federal Reserve Bank of Cleveland, Harvard University, LSE, NYU-Stern, Rice University, University of Warwick and Wharton for comments. We are grateful to George Hall for sharing his data with us. Batchimeg Sambaliat provided excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Antje Berndt & Hanno Lustig & Sevin Yeltekin, 2012. "How Does the US Government Finance Fiscal Shocks?," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 69-104, January. citation courtesy of