Macroeconomic implications of fiscal policy

Abstract

This thesis investigates the macroeconomics e ects of scal policy from a theoretical and empirical perspective. The rst part of the thesis surveys recent theoretical and empirical studies in the related literature. The analysis shows that while consensus has emerged on the positive e ect that an expansionary scal policy has on output and hours worked, no widespread consensus exists on the e ects that such a policy delivers to private consumption, real wages and investment. While in standard RBC models the negative wealth e ect on households' lifetime resource constraint prevails, in more or less articulated new-Keynesian models a crowding-in e ect of consumption and an increase in wages is made possible also under plausible calibrations. While early empirical contributions gave credit to the standard neoclassical predictions, the most recent econometric applications, generally making use of structural VARs, have supported and in many cases have inspired the latest new-Keynesian claims. Next, this work applies graphical modelling theory to identify scal policy shocks in SVAR models of the US economy. Unlike other econometric approaches { which achieve identi cation by relying on potentially contentious a priori assumptions { graphical modelling is a data based tool. Our results are in line with Keynesian theoretical models, being also quantitatively similar to those obtained in the recent SVAR literature a la Blanchard and Perotti (2002), and contrast with neoclassical real business cycle predictions. Stability checks con rm that our ndings are not driven by sample selection. In its nal part, the thesis empirically explores the information content of a large set of scal indicators for US real output growth and in ation. We provide evidence that

uctuations in certain scal variables contain valuable information to predict uctuations in output and prices. The distinction between federal and state-local scal indicators yields useful insights and helps de ne a new set of stylized facts for US macroeconomic conditions. First, we nd that variations in state-local indirect taxes as well as state government surplus or de cit help predict output growth. Next, the federal counterparts of these indicators contain valuable information for in ation. Finally, state-local expenditures help predict US in ation. A set of formal and informal stability tests con rm that these relationships are stable. The scal indicators in questions are also among theones that yield the best in-sample and out-of-sample performances.