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Economic Effects of Fiscal Shocks

Paper Session

Friday, Jan. 4, 2019 10:15 AM - 12:15 PM

Atlanta Marriott Marquis, International 6
Hosted By: American Economic Association
  • Chair: Alan J. Auerbach, University of California-Berkeley

The Impact of Tax Changes on the Macroeconomy: A New Approach Using Failed Tax Changes

Thummim Cho
,
London School of Economics
Yosub Jung
,
Harvard University
Bhargavi Sakthivel
,
London School of Economics

Abstract

We propose a simple way to address an endogeneity problem in tax multiplier studies. The endogeneity arises because lawmakers tend to propose and legislate tax cuts in anticipation of a slowing economy, making it difficult to identify the causal impact of tax changes on aggregate output. Although all proposed tax changes are likely to be correlated with the output expectations of lawmakers, only the legislated tax changes directly impact the economy. Hence, proposed tax changes that ultimately fail to become law can serve as a proxy for the unobserved output expectations of lawmakers. Using this proxy method and novel data on unlegislated tax proposals, we obtain a tax multiplier of -1.1 in our baseline specification for the United States from 1975 to 2017. Our approach can have a wide variety of applications to other fiscal multiplier studies.

Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus: Theory and Cross-Country Evidence

Jorge Miranda-Pinto
,
University of Queensland
Daniel Murphy
,
University of Virginia
Kieran Walsh
,
University of Virginia
Eric Young
,
University of Virginia

Abstract

We document that the interest rate response to fiscal stimulus (IRRF) is lower in countries with high inequality and high household debt. To interpret this evidence we develop a model in which households take on debt to maintain a minimum consumption threshold. Now debt-burdened, these households use additional income to deleverage. In economies with more debt-burdened households, increases in government spending tighten credit conditions less (relax credit conditions more), leading to smaller increases (larger declines) in the interest rate. To validate our mechanism we confirm that the consumption response to fiscal stimulus is lower in economies with high inequality or household debt. An implication of our theoretical and empirical results is that the sign of the debt-dependence of the effects of fiscal stimulus varies with credit conditions.

Can Government Demand Stimulate Private Investment? Evidence from United States Federal Procurement

Shafik Hebous
,
Goehte University Frankfurt
Tom Zimmerman
,
Federal Reserve Board

Abstract

We study the effects of federal purchases on firm investment using a novel panel dataset that combines federal procurement contracts in the United States with key financial firm- level information. Using panel fixed-effect models, propensity score matching, and inverse probability weighting estimation techniques, we find that 1 dollar of federal spending increases firms’ capital investment by 10 to 13 cents. However, this average effect masks heterogeneity across firms. Particularly, the effect is stronger for firms that face financing constraints and it is zero for unconstrained firms. This finding is robust for various measures of financing constraints. In line with the financial accelerator model, our findings indicate that the effect of government purchases works through easing firms’ access to external borrowing. Moreover, an industry-level analysis suggests that that the increase in investment at the firm level translates into an industry-wide effect without crowding-out capital investment of other firms in the same industry.

Local Fiscal Multipliers and Fiscal Spillovers in the United States

Alan J. Auerbach
,
University of California-Berkeley
Yuriy Gorodnichenko
,
University of California-Berkeley
Daniel Murphy
,
University of Virginia

Abstract

We estimate local fiscal multipliers and spillovers for the United States using a rich dataset based on U.S. Department of Defense contracts and a variety of outcome variables relating to income and employment. We find strong positive spillovers across locations and industries. Both backward linkages and general equilibrium effects (e.g., income multipliers) contribute to the positive spillovers. Geographical spillovers appear to dissipate fairly quickly with distance. Our evidence points to the relevance of Keynesian-type models that feature excess capacity.
Discussant(s)
Ethan Ilzetzki
,
London School of Economics
Philippe Wingender
,
International Monetary Fund
Eric Zwick
,
University of Chicago
Christoph Boehm
,
University of Texas-Austin
JEL Classifications
  • E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • H3 - Fiscal Policies and Behavior of Economic Agents