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Macroeconomic Effects of Government Spending: The Great Recession was (Really) Different
Author(s) -
KLEIN MATHIAS,
LINNEMANN LUDGER
Publication year - 2019
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12558
Subject(s) - economics , government spending , business cycle , shock (circulatory) , recession , fiscal policy , monetary economics , consumption (sociology) , vector autoregression , zero lower bound , consumer confidence index , consumer spending , keynesian economics , macroeconomics , interest rate , market economy , medicine , social science , sociology , welfare
We estimate the effect of government spending shocks on the U.S. economy with a time‐varying parameter vector autoregression. The recent Great Recession period appears to be characterized by uniquely large impulse responses of output to fiscal shocks. Moreover, the particularity of this period is underlined by highly unusual responses of several other variables. The pattern of fiscal shock responses neither completely fits the predictions of the New Keynesian model of an economy subject to the zero lower bound on nominal interest rates, nor does it suggest regular variation of fiscal policy effects depending on the state of the business cycle. Rather, the Great Recession period seems special in that government spending shocks had a strongly negative effect on the spread between corporate and government bond yields and a strongly positive effect on consumer confidence and private consumption spending.