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Putting Government Spending Shocks under the Microscope: Standard Vector Autoregression versus the Narrative Approach

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Standard vector autoregression and the narrative approach yield contrasting responses of consumption and real wages to a government spending shock. A key difference in the approaches is the composition of identified shocks. Standard VAR features a large increase in government purchase of intermediate goods and services and investment, but a small response of government employment compensation. By contrast, the narrative approach identifies a smaller increase in intermediate goods and services purchase but a large increase in employment compensation. Furthermore, empirical evidence indicates impacts of fiscal stimulus vary considerably for different types of spending from the American Recovery and Reinvestment Act.
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Keywords: ARRA; GOVERNMENT SPENDING; NARRATIVE APPROACH; STANDARD VAR

Document Type: Research Article

Publication date: 01 September 2017

This article was made available online on 14 June 2017 as a Fast Track article with title: "Putting Government Spending Shocks under the Microscope: Standard Vector Autoregression versus the Narrative Approach".

More about this publication?
  • As one of the world's oldest professional journals in public finance, founded in 1884, FinanzArchiv (FA) publishes original work from all fields of public economics which are of interest to an international readership, e.g. taxation, public debt, public goods, public choice, federalism, market failure, social policy, and the welfare state. Special emphasis is on high-quality theoretical and empirical papers on current policy issues.

    FA is a peer-reviewed journal commited to a prompt turnaround of submissions.

    FA is listed in the Social Science Citation Index (SSCI), in Current Contents/Social and Behavioral Sciences, in Econ Lit, in the Journal of Economic Literature, in IDEAS and RePEc and in the International Bibliography of the Social Sciences.

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