Skip to content
Licensed Unlicensed Requires Authentication Published by De Gruyter August 3, 2020

Evaluating Changes in the Transmission Mechanism of Government Spending Shocks

Nooman Rebei

Abstract

We empirically revisit the crowding-in effect of government spending on private consumption based on rolling windows of U.S. data. Results show that in earlier samples government spending is increasingly crowding in private consumption; however, this relation is reverted in the latest periods. We propose a model embedding non-separable public and private consumption in the utility function and rule-of-thumb consumers to assess the sources of non-monotonic changes in the transmission of the shock. The iterative full information estimation of the model reveals that changes in the co-movement between private and public spending is primarily driven by the fluctuations in the elasticity of substitution between private and public consumption, the share of financially constrained consumers, and the elasticity of intertemporal substitution.

JEL classification: E2; E6; H3; H5

Corresponding author: Nooman Rebei, International Monetary Fund, 700 19th St. NW., Washington, DC, 20431, USA, E-mail:
Correction Note: Correction made on 16 March 2021 after the article was published online: Mistakenly this article was first published in the “Contributions” category instead of “Advances”.

Appendix A Estimation Results

Table A1:

Recursive Bayesian estimation.

Prior distributionPosterior averages and 90 percent confidence intervals
shapemeans.d.19501980195319831956198619591989196219921965199519681998197120011974200419772007198020101983201319852015
ΦGamma0.50.20.248[0.137,0.360]0.275[0.154,0.401]0.310[0.175,0.452]0.323[0.175,0.472]0.301[0.171,0.426]0.296[0.165,0.420]0.282[0.165,0.397]0.319[0.173,0.452]0.316[0.185,0.445]0.482[0.278,0.666]0.482[0.284,0.678]0.420[0.261,0.579]0.525[0.350,0.694]
σNormal1.00.51.622[1.035,2.183]1.861[1.208,2.429]1.703[1.073,2.352]1.711[1.041,2.386]1.579[0.941,2.190]1.548[0.926,2.167]1.477[0.824,2.101]1.618[0.958,2.263]1.574[0.973,2.136]1.989[1.343,2.587]2.028[1.394,2.637]2.190[1.607,2.777]2.244[1.637,2.838]
χGamma5.03.01.342[0.196,2.628]5.395[0.554,9.409]9.208[4.657,13.512]9.861[4.293,15.091]9.279[4.130,14.433]9.253[4.186,14.608]8.365[3.108,12.892]8.645[3.673,14.128]7.602[2.707,12.279]5.656[2.497,8.881]6.333[2.609,9.977]5.869[1.558,9.640]5.965[1.389,10.770]
κBeta0.70.10.720[0.564,0.885]0.725[0.574,0.883]0.714[0.551,0.875]0.720[0.572,0.880]0.718[0.558,0.879]0.715[0.565,0.884]0.706[0.547,0.873]0.721[0.564,0.884]0.711[0.546,0.878]0.713[0.565,0.876]0.716[0.557,0.866]0.746[0.593,0.901]0.747[0.584,0.910]
νGamma0.70.20.707[0.450,0.948]0.689[0.419,0.982]0.663[0.426,0.865]0.640[0.374,0.927]0.497[0.342,0.634]0.498[0.329,0.681]0.476[0.335,0.623]0.572[0.353,0.800]0.475[0.348,0.601]0.708[0.437,0.984]0.619[0.391,0.874]0.591[0.344,0.861]0.575[0.306,1.044]
γBeta0.50.20.622[0.489,0.749]0.583[0.462,0.705]0.537[0.414,0.657]0.527[0.405,0.674]0.551[0.422,0.677]0.582[0.472,0.702]0.615[0.505,0.731]0.571[0.454,0.677]0.568[0.440,0.696]0.445[0.333,0.554]0.466[0.347,0.575]0.464[0.338,0.591]0.458[0.331,0.579]
ϕgGamma0.10.10.118[0.029,0.209]0.118[0.031,0.203]0.123[0.027,0.211]0.119[0.029,0.208]0.112[0.028,0.195]0.115[0.029,0.198]0.115[0.029,0.203]0.125[0.029,0.220]0.107[0.026,0.186]0.109[0.027,0.190]0.112[0.025,0.192]0.111[0.023,0.191]0.111[0.027,0.193]
ϕbInv-gamma0.54.00.228[0.125,0.319]0.210[0.123,0.294]0.272[0.144,0.384]0.260[0.127,0.376]0.191[0.112,0.268]0.203[0.120,0.287]0.192[0.126,0.258]0.249[0.140,0.355]0.180[0.116,0.241]0.397[0.221,0.566]0.330[0.171,0.466]0.152[0.097,0.198]0.143[0.095,0.191]
ΘBeta0.80.10.721[0.648,0.793]0.733[0.663,0.803]0.729[0.662,0.792]0.729[0.661,0.802]0.732[0.667,0.802]0.730[0.666,0.797]0.712[0.644,0.785]0.708[0.641,0.778]0.716[0.647,0.788]0.737[0.670,0.804]0.743[0.674,0.816]0.749[0.666,0.834]0.730[0.654,0.812]
αBeta0.30.10.194[0.150,0.236]0.229[0.183,0.274]0.279[0.233,0.328]0.272[0.220,0.317]0.259[0.213,0.305]0.262[0.216,0.306]0.259[0.216,0.302]0.269[0.218,0.319]0.254[0.212,0.298]0.303[0.246,0.358]0.297[0.238,0.354]0.265[0.210,0.319]0.220[0.172,0.267]
ρRBeta0.50.20.527[0.421,0.646]0.551[0.437,0.678]0.456[0.334,0.573]0.493[0.371,0.609]0.530[0.413,0.647]0.558[0.450,0.679]0.543[0.416,0.655]0.507[0.364,0.641]0.481[0.364,0.595]0.464[0.362,0.568]0.478[0.376,0.581]0.563[0.464,0.661]0.629[0.555,0.706]
ρπNormal1.50.21.270[1.035,1.496]1.383[1.128,1.612]1.433[1.228,1.649]1.451[1.228,1.669]1.438[1.204,1.670]1.456[1.235,1.685]1.433[1.202,1.672]1.441[1.190,1.660]1.439[1.172,1.713]1.522[1.325,1.736]1.510[1.293,1.709]1.629[1.400,1.855]1.574[1.296,1.825]
ρyNormal0.10.10.196[0.144,0.248]0.205[0.155,0.258]0.200[0.153,0.242]0.208[0.163,0.259]0.218[0.169,0.267]0.223[0.172,0.271]0.239[0.190,0.287]0.235[0.184,0.287]0.245[0.191,0.295]0.225[0.180,0.270]0.214[0.170,0.257]0.165[0.124,0.207]0.153[0.114,0.191]
ρgBeta0.60.20.896[0.844,0.946]0.908[0.852,0.966]0.934[0.892,0.977]0.933[0.888,0.977]0.946[0.912,0.979]0.942[0.908,0.979]0.945[0.911,0.981]0.938[0.899,0.979]0.952[0.919,0.985]0.930[0.890,0.974]0.931[0.881,0.978]0.929[0.888,0.975]0.947[0.916,0.979]
ρABeta0.20.10.347[0.156,0.531]0.378[0.194,0.561]0.209[0.052,0.365]0.216[0.043,0.375]0.291[0.087,0.483]0.283[0.081,0.483]0.321[0.122,0.514]0.245[0.034,0.451]0.453[0.242,0.682]0.173[0.037,0.301]0.211[0.042,0.373]0.215[0.053,0.361]0.207[0.041,0.354]
ρIBeta0.60.20.483[0.311,0.655]0.439[0.299,0.568]0.443[0.322,0.558]0.470[0.323,0.610]0.438[0.308,0.557]0.442[0.329,0.562]0.427[0.317,0.538]0.448[0.331,0.566]0.409[0.303,0.521]0.462[0.315,0.602]0.458[0.346,0.570]0.631[0.521,0.742]0.675[0.570,0.776]
ριBeta0.60.20.961[0.937,0.987]0.945[0.917,0.973]0.918[0.869,0.965]0.918[0.870,0.967]0.921[0.877,0.971]0.922[0.874,0.967]0.927[0.886,0.971]0.914[0.865,0.967]0.935[0.901,0.971]0.922[0.880,0.967]0.946[0.915,0.983]0.952[0.924,0.982]0.933[0.895,0.974]
σgInv-gamma0.014.00.0157[0.018,0.018]0.013[0.011,0.015]0.012[0.010,0.014]0.011[0.009,0.013]0.011[0.009,0.013]0.010[0.008,0.012]0.009[0.007,0.011]0.009[0.007,0.011]0.009[0.008,0.011]0.008[0.007,0.010]0.008[0.007,0.010]0.009[0.007,0.010]0.008[0.007,0.009]
σAInv-gamma0.014.00.0052[0.007,0.007]0.005[0.004,0.006]0.002[0.001,0.003]0.003[0.001,0.005]0.004[0.002,0.006]0.004[0.002,0.006]0.004[0.003,0.005]0.002[0.001,0.004]0.004[0.003,0.005]0.002[0.001,0.002]0.002[0.001,0.003]0.004[0.003,0.005]0.004[0.003,0.005]
σIInv-gamma0.014.00.0505[0.088,0.088]0.201[0.029,0.335]0.308[0.176,0.436]0.282[0.148,0.412]0.297[0.162,0.425]0.282[0.158,0.406]0.259[0.135,0.374]0.252[0.138,0.375]0.243[0.119,0.357]0.161[0.069,0.246]0.188[0.095,0.278]0.120[0.045,0.198]0.101[0.032,0.172]
σRInv-gamma0.0054.00.0013[0.002,0.002]0.002[0.001,0.002]0.002[0.001,0.002]0.002[0.001,0.002]0.002[0.001,0.002]0.002[0.001,0.002]0.002[0.001,0.002]0.002[0.001,0.002]0.001[0.001,0.002]0.001[0.001,0.002]0.001[0.001,0.002]0.001[0.001,0.001]0.001[0.001,0.001]
σιInv-gamma0.0054.00.0062[0.010,0.010]0.008[0.005,0.012]0.008[0.005,0.010]0.008[0.005,0.011]0.008[0.005,0.012]0.008[0.006,0.011]0.007[0.005,0.010]0.007[0.004,0.009]0.007[0.004,0.010]0.006[0.004,0.008]0.008[0.004,0.011]0.007[0.004,0.011]0.005[0.003,0.008]

References

Auerbach, A. J., and Y. Gorodnichenko. 2012. “Measuring the Output Responses to Fiscal Policy.” American Economic Journal: Economic Policy 4: 1–27, https://doi.org/10.1257/pol.4.2.1.Search in Google Scholar

Berger, D., and J. Vavra. 2014. “Measuring How Fiscal Shocks Affect Durable Spending in Recessions and Expansions.” American Economic Review 104: 112–5, https://doi.org/10.1257/aer.104.5.112.Search in Google Scholar

Bhatt, V., N. K. Kishor, and H. Marfatia. 2019. “Estimating Excess Sensitivity and Habit Persistence in Consumption Using Greenbook Forecasts.” Oxford Bulletin of Economics and Statistics 81: 1–28. https://doi.org/10.1111/obes.12333.Search in Google Scholar

Bilbiie, F. O., A. Meier, and G. J. Müller. 2008. “What Accounts for the Changes in U.S. Fiscal Policy Transmission?” Journal of Money, Credit and Banking 40: 1439–69, https://doi.org/10.1111/j.1538-4616.2008.00166.x.Search in Google Scholar

Blanchard, O., and R. Perotti. 2002. “An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output.” The Quarterly Journal of Economics 117: 1329–68, https://doi.org/10.1162/003355302320935043.Search in Google Scholar

Bouakez, H., F. Chihi, and M. Normandin. 2014. “Measuring the Effects of Fiscal Policy.” Journal of Economic Dynamics and Control 47: 123–51, https://doi.org/10.1016/j.jedc.2014.08.004.Search in Google Scholar

Bouakez, H., and N. Rebei. 2007. “Why Does Private Consumption Rise After a Government Spending Shock?” Canadian Journal of Economics 40: 954–79, https://doi.org/10.1111/j.1365-2966.2007.00438.x.Search in Google Scholar

Campbell, John Y., Mankiw, N. Gregory. 1989. “Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence.” In NBER Macroeconomics Annual., edited by Blanchard, O. Fischer, S. 185–216. MIT Press.10.3386/w2924Search in Google Scholar

Canova, Fabio. 2006. Monetary Policy and the Evolution of the U.S. Economy. CEPR Discussion Papers 5467.Search in Google Scholar

Canova, F., and L. Sala. 2009. “Back to Square One: Identification Issues in DSGE Models.” Journal of Monetary Economics 56: 431–49, https://doi.org/10.1016/j.jmoneco.2009.03.014.Search in Google Scholar

Castelnuovo, E. 2012. “Estimatinf the Evolution of Money’s Role in the U.S. Monetary Business Cycle.” Journal of Money, Credit and Banking 44: 23–52, https://doi.org/10.1111/j.1538-4616.2011.00468.x.Search in Google Scholar

Cimadomo, J., and A. Bénassy-Quéré. 2012. “Changing Patterns of Fiscal Policy Multipliers in Germany, the UK and the US.” Journal of Macroeconomics 34: 845–73, https://doi.org/10.1016/j.jmacro.2012.02.006.Search in Google Scholar

Coenen, G., and R. Straub. 2005. “Does Government Spending Crowd in Private Consumption? Theory and Empirical Evidence for the Euro Area.” International Finance 8: 435–70, https://doi.org/10.1111/j.1468-2362.2005.00166.x.Search in Google Scholar

Fatas, Antonio, and Ilian Mihov. 2001. The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence. CEPR Discussion Papers No. 2760.Search in Google Scholar

Fazzari, S. M., J. Morley, and I. Panovska. 2015. “State-Dependent Effects of Fiscal Policy.” Studies in Nonlinear Dynamics and Econometrics 19: 285–315, https://doi.org/10.1515/snde-2014-0022.Search in Google Scholar

Fisher, J., and R. Peters. 2010. “Using Stock Returns to Identify Government Spending Shocks.” Economic Journal 120: 414–36, https://doi.org/10.1111/j.1468-0297.2010.02355.x.Search in Google Scholar

Galí, J., J. D. López-Salido, and J. Vallés. 2007. “Understanding the Effects of Government Spending on Consumption.” Journal of the European Economic Association 5: 227–70, https://doi.org/10.1162/jeea.2007.5.1.227.Search in Google Scholar

King, R. G., C. I. Plosser, and S. T. Rebelo. 1988. “Production, Growth and Business Cycles : I. The Basic Neoclassical Model.” Journal of Monetary Economics 88: 195–232, https://doi.org/10.1016/0304-3932(88)90030-x.Search in Google Scholar

Kormilitsina, A., and S. Zubairy. 2016. Propagation Mechanisms for Government Spending Shocks: A Bayesian Comparison. Mimeo, Southern Methodist University.Search in Google Scholar

Linnemann, L., and A. Schabert. 2006. “Productive Government Expenditure in Monetary Business Cycle Models.” Scottish Journal of Political Economy 53: 28–46, https://doi.org/10.1111/j.1467-9485.2006.00369.x.Search in Google Scholar

Mountford, A., and H. Uhlig. 2009. “What Are the Effects of Fiscal Policy Shocks?” Journal of Applied Econometrics 24: 960–92, https://doi.org/10.1002/jae.1079.Search in Google Scholar

Perotti, Roberto. 2005. Estimating the Effects of Fiscal Policy in OECD Countries. CEPR Discussion Papers 4842.10.2139/ssrn.637189Search in Google Scholar

Prescott, E. C. 1986. “Theory Ahead of Business Cycle Measurement.” Carnegie-Rochester Conference Series on Public Policy 11: 11–44, https://doi.org/10.1016/0167-2231(86)90035-7.Search in Google Scholar

Ramey, V. A. 2011. “Identifying Government Spending Shocls: It’s All in the Timing.” The Quarterly Journal of Economics 126: 1–50, https://doi.org/10.1093/qje/qjq008.Search in Google Scholar

Ramey, Valerie, A., and Sarah, Zubairy. 2014. Government Spending Multipliers in Good Times and in Bad: Evidence From U.S. Historical Data. NBER Working Paper No. 20719.10.3386/w20719Search in Google Scholar

Ravn, M. O., S. Schmitt-Grohé, and M. Uribe. 2012. “Consumption, Government Spending, and the Real Exchange Rate.” Journal of Monetary Economics 59: 215–34, https://doi.org/10.1016/j.jmoneco.2012.02.001.Search in Google Scholar

Rebei, N. 2014. “What (really) Accounts for the Fall in Hours After a Technology Shock?” Journal of Economic Dynamics and Control 45: 330–52, https://doi.org/10.1016/j.jedc.2014.05.022.Search in Google Scholar

Shea, J. 1995. “Union Contracts and the Life-Cycle/Permanent-Income Hypothesis.” American Economic Review 85: 186–200.Search in Google Scholar

Tagkalakis, A. 2008. “The Effects of Fiscal Policy on Consumption in Recessions and Expansions.” Journal of Public Economics 92: 1486–508, https://doi.org/10.1016/j.jpubeco.2007.11.007.Search in Google Scholar

Received: 2017-12-15
Accepted: 2020-05-24
Published Online: 2020-08-03

© 2020 Walter de Gruyter GmbH, Berlin/Boston