Essays on macroeconometrics and fiscal policy

How does government spending affect the macroeconomy? This question has been a long-standing question in macroeconomics. The key object of interest is the government spending multiplier which measures the change in output in response to a $1 increase in government spending. The central question of the literature is then about whether the multiplier exceeds 1. Despite an extensive amount of research, the literature has not come to a satisfying conclusion. This dissertation consists of three self-contained chapters that analyze how government spending affects the economy. In Chapter 1, I study how government spending affects aggregated and disaggregated consumption variables. I use a Bayesian factor-augmented vector autoregression (BFAVAR) model that allows me to employ information from over 200 macroeconomic variables. In addition, I use traditional and narrative sign restrictions for identification. This approach identifies a government spending shock under minimal identifying assumptions. My analysis suggests that government spending increases aggregate consumption, and that there exists heterogeneity within durable, nondurable and service consumption variables. Finally, the estimated multiplier is close to 2. In Chapter 2, co-authored with Collin Philipps, I analyze how the effect of government spending on the economy depends on the monetary policy regime. Conventional wisdom suggests that the government spending multiplier is larger when monetary policy is passive. I estimate a Taylor rule with time-varying coefficients and use the estimated sequence of inflation parameters to inform the monetary policy regimes in a smooth-transition vector autoregression (ST-VAR) model. I then employ generalized impulse response functions (GIRFs) to estimate the dynamic effects of a government spending shock. This type of impulse response functions allow the central bank to adjust its monetary policy regime in response to the economic conditions after the government spending shock. I find that the monetary policy regime itself changes quickly after the shock. The rapid change of the monetary policy regime leaves the government spending multiplier almost completely unaffected by the initial monetary policy regime. In Chapter 3, co-authored with Collin Philipps, I investigate how the impact of government spending on the economy varies with the business cycle. Keynesian economics predict that the multiplier is larger during recessions. I estimate a ST-VAR model and use GIRFs to estimate the dynamic effects of a government spending shock. My analysis suggests that the government spending multiplier does not differ between expansions and recessions. Instead, I find that if the economy is hit by a government spending shock during a recession, the economy leaves the recession quickly and reaches a similar growth path as it was hit during an expansion.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Economics

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2022

Author dc:creator

• Laumer, Sebastian

Contributors dc:contributor

• Amir-Ahmadi, Pooyan
• Bernhardt, Dan
• Shin, Minchul
• Krasa, Stefan

• Fiscal Policy, Structural Vector Autoregression

Statement dc:rights

• Copyright 2021 Sebastian Laumer

Language dc:language

en

Handle dc:identifier

http://hdl.handle.net/2142/113046

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/113046