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Journal Article

An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output

Olivier Blanchard and Roberto Perotti
The Quarterly Journal of Economics
Vol. 117, No. 4 (Nov., 2002), pp. 1329-1368
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/4132480
Page Count: 40
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An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output
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Abstract

This paper characterizes the dynamic effects of shocks in government spending and taxes on U. S. activity in the postwar period. It does so by using a mixed structural VAR/event study approach. Identification is achieved by using institutional information about the tax and transfer systems to identify the automatic response of taxes and spending to activity, and, by implication, to infer fiscal shocks. The results consistently show positive government spending shocks as having a positive effect on output, and positive tax shocks as having a negative effect. One result has a distinctly nonstandard flavor: both increases in taxes and increases in government spending have a strong negative effect on investment spending.

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