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Fiscal Policy And Economic Activity: Us Evidence

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  • K. Peren Arin
  • Faik Koray

Abstract

We investigate the dynamic effects of five different fiscal shocks on the US economy using a structural vector autoregressive (SVAR) model that uses Blanchard-Quah type restrictions. We find that an increase in indirect taxes or in corporate taxes has a contractionary effect on the economy, while an increase in personal taxes is neither contractionary, nor expansionary. These results imply that the Ricardian Equivalence hypothesis holds only for personal taxes. On the spending side, we find that an increase in government wages and salaries has a contractionary effect on the economy, while an increase in defense spending is expansionary. Our results suggest that different fiscal shocks have different and offsetting effects on the economy, and using aggregated data may, therefore, conceal the effects of fiscal policy.

Suggested Citation

  • K. Peren Arin & Faik Koray, 2005. "Fiscal Policy And Economic Activity: Us Evidence," CAMA Working Papers 2005-09, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2005-09
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    Cited by:

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    2. James Feyrer & Jay Shambaugh, 2012. "Global Savings and Global Investment: The Transmission of Identified Fiscal Shocks," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 95-114, May.
    3. Razzak, Weshah, 2005. "Explaining the gaps in labour productivity in some developed countries," MPRA Paper 1888, University Library of Munich, Germany, revised May 2006.
    4. Razzak, Weshah, 2006. "Explaining the gaps in labour productivity for some developed countries," MPRA Paper 53, University Library of Munich, Germany.
    5. Razzak, W.A., 2007. "Explaining The Gaps In Labour Productivity In Some Developed Countries: New Zealand, Australia, The United States And Canada, 1988-2004," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(2).
    6. Arin, K. Peren & Mamun, Abdullah & Purushothman, Nanda, 2009. "The effects of tax policy on financial markets: G3 evidence," Review of Financial Economics, Elsevier, vol. 18(1), pages 33-46, January.

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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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