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American Economic Journal: Macroeconomics: Vol. 4 No. 1 (January 2012)

AEJ: Macro Volume. 4, Issue 1 | Previous ArticleNext Article

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How Does the US Government Finance Fiscal Shocks?

Article Citation

Berndt, Antje, Hanno Lustig, and Şevin Yeltekin. 2012. "How Does the US Government Finance Fiscal Shocks?." American Economic Journal: Macroeconomics, 4(1): 69-104.

DOI: 10.1257/mac.4.1.69

Abstract

We develop a method for identifying and quantifying the fiscal channels that help finance government spending shocks. We define fiscal shocks as surprises in defense spending and show that they are more precisely identified when defense stock data are used in addition to aggregate macroeconomic data. Our results show that in the postwar period, about 9 percent of the US government's unanticipated spending needs were financed by a reduction in the market value of debt and more than 70 percent by an increase in primary surpluses. Additionally, we find that long-term debt is more effective at absorbing fiscal risk than short-term debt. (JEL E62, H56, and H63)

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Authors

Berndt, Antje (Carnegie Mellon U)
Lustig, Hanno (UCLA)
Yeltekin, Şevin (Carnegie Mellon U)

JEL Classifications

E62: Fiscal Policy
H56: National Security and War
H63: National Debt; Debt Management; Sovereign Debt

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