Differences in measures of the fiscal multiplier and the reduced-form vector autoregression

ABSTRACT

The literature has recently asked whether the effects of fiscal policy vary with the state of the economy (Christiano, Eichenbaum, and Rebelo 2011; Rendahl 2014; Auerbach and Gorodnichenko 2012). We study this question in the context of vector autoregression (VAR) estimation. We show formally that, if (asymptotically) the parameters of the reduced-form VAR differ, then the dynamic effects of fiscal policy differ as well, generically and for any set of identification assumptions. Thus, in theory, the econometrician can detect these differences (either across time or space) generically just by relying on reduced-form VAR estimation.

KEYWORDS:

• Fiscal policy
• macroeconomic fluctuations

JEL CLASSIFICATION:

• E62
• E32

Acknowledgements

We thank Pierpaolo Benigno, Daniele Terlizzese and LUISS Guido Carli seminar participants for useful comments. Grasso and Milano thank the Research Center SAFE for hospitality and support during the preparation of this article.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ It is well known that this assumption is restrictive because of fiscal foresight. Recently, applied researchers have argued that the inclusion of measures of fiscal expectations is a useful way to alleviate such concerns (see, for instance, the discussion in Auerbach and Gorodnichenko 2012, p. 3. See also Berg 2014.)