the expected inflation channel of government spending in the postwar u s abstract there exist sticky price models in which the output response to a government spending change can be large if the central bank is nonresponsive to inflation according to this expected inflation channel government spending drives up expected inflation which in turn reduces the real interest rate and leads to an increase in private consumption this paper examines whether the channel was important in the post wwii u s with particular attention to the 2009 recovery act period first we show that a model calibrated to have a large output multiplier requires a large response of expected inflation to a government spending shock next we show that this large response is inconsistent with structural vector autoregression evidence from the federal reserve s passive policy period 1959 1979 then we study expected inflation measures during the recovery act period in conjunction with a panel of professional forecaster surveys a cross country comparison of bond yields and fiscal policy news announcements we show that the expected inflation response was too small to engender a large output multiplier

structural transformation the mismeasurement of productivity growth and the cost disease of services if workers self select into industries based upon their relative productivity in different tasks and comparative advantage is aligned with absolute advantage then the average efficacy of a sector s workforce will be negatively correlated with its employment share this might explain the difference in the reported productivity growth of contracting goods and expanding services instrumenting with defense expenditures i find the elasticity of worker efficacy with respect to employment shares is substantially negative albeit estimated imprecisely the estimates suggest that the view that goods and services have similar productivity growth rates is a plausible alternative characterization of growth in developed economies jel e23 e24 h56 j24 o41 o47 one of the strongest and seemingly most accurate characterizations of the process and problems of growth in advanced economies is william baumol s cost disease of services baumol s argument begun in papers as early as 1965 and continuing to this very day e g baumol and bowen 1965 baumol 1967 baumol blackman and wolff 1985 and baumol 2012 starts from the premise that productivity growth is inherently more difficult to achieve in the production of services than in the pro

three persistent myths in the environmental debate abstract throughout the last three decades of working on environmental and resource problems i have encountered three persistent myths 1 environment conflicts with employment 2 production must grow to create scope for financing environmental conservation and 3 although society would like to save the environment it is too expensive testing these three propositions individually and mutually leads to the conclusion that as long as they dominate the environmental debate the world will drift ever further away from environmental sustainability

nonlinear effects of mortgage spreads over the business cycle this paper provides robust evidence for the nonlinear effects of mortgage spread shocks during recessions and expansions in the united states estimating a smooth transition vector autoregression stvar model we show that mortgage spread shocks hitting in a recessionary phase create significantly deeper and more protracted declines in consumption and housing market variables in addition we provide evidence that these mortgage spread shocks could be largely interpreted as credit supply shocks in the mortgage market our empirical results imply that unconventional monetary policy such as the federal reserve s mortgage backed security purchase program would be a more effective tool for stabilizing the economy during recessions than in expansions

nash equilibria in models of fiscal competition abstract this paper analyzes nash equilibria in a simple model of an economy with jurisdictions engaging in fiscal competition small number nash equilibria in which tax rates are the strategic variables are shown not to coincide with nash equilibria in which public expenditure levels are the strategic variables

presidents and the u s economy an econometric exploration the us economy has performed better when the president of the united states is a democrat rather than a republican almost regardless of how one measures performance for many measures including real gdp growth our focus the performance gap is large and significant this paper asks why the answer is not found in technical time series matters nor in systematically more expansionary monetary or fiscal policy under democrats rather it appears that the democratic edge stems mainly from more benign oil shocks superior total factor productivity tfp performance a more favorable international environment and perhaps more optimistic consumer expectations about the near term future jel d72 e23 e32 e65 n12 n42 an extensive and well known literature of scholarly research documents and explores the fact that macroeconomic performance is a strong predictor of us presidential election outcomes scores of papers find that better performance boosts the vote of the incumbent s party 1 in stark contrast economists have paid scant attention to predictive power running in the opposite direction from election outcomes to subsequent macroeconomic performance the answer while hardly a secret is not nearly as widely known as it should be 2 the us economy performs much better when a democrat is president than when a republican is

constitutional rules of exclusion in jurisdiction formation the rules under which jurisdictions nations provinces can deny immigration or expel residents are generally governed by a constitution but there do not exist either positive or normative analyses to suggest what types of exclusion rules are best we stylize this problem by suggesting four constitutional rules of admission free mobility admission by majority vote admission by unanimous consent admission by a demand threshold for public goods in a simple model we characterize the equilibria that result from these rules and provide a positive theory for which constitutional rules will be chosen

pre announcement and timing the effects of a government expenditure shock abstract an econometric strategy to identify a pre announced fiscal policy shock is proposed i show that the reduced form innovations can be recovered by estimating a vector moving average model using the kalman filter the structural effects are identified exploiting the shock s pre announced nature which leads to potentially different signs of the responses of some endogenous variables during the announcement and after the realization of the shock i illustrate my strategy by identifying a pre announced shock to government consumption expenditures i find that the response of private consumption is significantly negative on impact rises and becomes significantly positive two quarters after the realization of the policy shock

separating the wheat from the chaff a disaggregate analysis of the effects of public spending in the us in this paper we undertake a systematic disaggregate analysis of the effects of government spending on economic activity in the us the level of disaggregation we consider is the highest available and is unprecedented in the empirical literature more specifically public consumption and public investment are decomposed into various subcategories which are measured at the levels of the federal defence and non defence and state and local governments for each subcategory we estimate a structural vector autoregression that identifies public spending shocks through the conditional heteroskedasticity of the structural disturbances thus relaxing the identifying restrictions commonly used in the literature our analysis reveals significant heterogeneity in the effects of public spending shocks on output both across subcategories and government levels shocks to spending on durables and structures are found to have the largest and most persistent effect on aggregate output with a peak multiplier that exceeds 1 our results also suggest that there is little association between the size of a given category of public expenditures and the magnitude of its effect on output resume separer le bon grain de l ivraie une analyse desagregee des effets des depenses publiques aux etats unis dans ce texte on entreprend une analyse desagregee des effets des depenses gouvernementales sur l activite economique aux etats unis le niveau de desagregation considere est le plus grand possible et est sans precedent dans la litterature empirique plus specifiquement la consommation et l investissement publics sont decomposes en diverses sous categories qui sont mesurees pour le gouvernement federal defense et non defense ainsi que pour les gouvernements des etats et locaux pour chaque sous categorie on estime un vecteur autoregressif structurel qui identifie les chocs de depenses publiques a travers l heteroscedastictite conditionnelle des perturbations structurelles pour ainsi rel cher les restrictions d identification communement utilisees dans la litterature l analyse revele une heterogeneite significative dans les effets des chocs de depenses publiques sur la production agregee selon les sous categories et les niveaux de gouvernement les chocs dans les depenses sur les biens durables et les structures tendent a avoir les effets les plus grands et les plus persistants sur la production agregee avec un effet multiplicateur qui excede 1 les resultats suggerent qu il y a peu de rapport entre la taille d une categorie donnee dans les depenses publiques et l ampleur de l effet sur la production agregee

how large is the government spending multiplier evidence from world bank lending this paper proposes a novel method of isolating fluctuations in public spending that are likely to be uncorrelated with contemporaneous macroeconomic shocks and can be used to estimate government spending multipliers the approach relies on two features unique to many low income countries 1 borrowing from the world bank finances a substantial fraction of public spending and 2 actual spending on world bank financed projects is typically spread out over several years following the original approval of the project these two features imply that fluctuations in spending on world bank projects in a given year are in large part determined by fluctuations in project approval decisions made in previous years and so are unlikely to be correlated with shocks to output in the current year world bank project level disbursement data are used to isolate the component of public spending associated with project approvals from previous years which in turn can be used to estimate government spending multipliers in a sample of 29 aid dependent low income countries the estimated multipliers are small reasonably precisely estimated and rarely significantly different from zero

government spending and heterogeneous consumption dynamics abstract what is the effect of government spending on consumption neoclassical and new keynesian models deliver opposing predictions and empirical studies differ in their conclusions this paper takes a data driven approach and exploits information from over 200 variables via a bayesian factor augmented var model i use sign restrictions for identifying effects that both classes of models agree upon this approach imposes a minimal set of restrictions on the empirical model leaving the sign and magnitude of the effect of government spending on consumption free to be determined by the data i find that i government spending increases aggregate consumption ii the estimated spending multiplier is close to 2 iii there exists heterogeneity even within durable nondurable and service consumption variables which is undocumented in the literature finally i show that my identified structural shocks are not predictable by economic agents and are uncorrelated with traditional monetary policy shocks suggesting that these effects are not confounded by monetary policy

economic theories of the break up and integration of nations abstract this paper surveys the recent political economy literature on the size distribution of nations the main themes of this literature are 1 a the spread of democracy leads to the creation of too many sovereign states 2 b the extent of factor mobility plays a key role in determining the incentives towards separation or integration 3 c economic integration through the development of international trade may require greater political integration to create and effectively maintain a level playing field in international trade at the same time economic integration by reducing the economic costs of separation increases the incentives towards political separation

fiscal policy in the aftermath of 9 11 this paper investigates the nature of u s fiscal policy in the aftermath of 9 11 we argue that the recent declines in the government surplus and tax rates cannot be accounted for by either the state of the u s economy as of 9 11 or as the typical response of fiscal policy to a large exogenous rise in military expenditures our evidence suggests that had tax rates responded in the way they normally do to a large fiscal shock aggregate output would have been lower and the surplus would not have changed by much our results do not bear directly on the desirability of the decline in tax rates or the surplus after 9 11

measuring the effects of fiscal policy measuring the effects of discretionary fiscal policy is both difficult and controversial as some explicit or implicit identifying assumptions need to be made to isolate exogenous and unanticipated changes in taxes and government spending studies based on structural vector autoregressions typically achieve identification by restricting the contemporaneous interaction of fiscal and non fiscal variables in a rather arbitrary way in this paper we relax those restrictions and identify fiscal policy shocks by exploiting the conditional heteroscedasticity of the structural disturbances we use this methodology to evaluate the macroeconomic effects of fiscal policy shocks in the u s before and after 1979 our results show substantive differences in the economy s response to government spending and tax shocks across the two periods importantly we find that increases in public spending are in general more effective than tax cuts in stimulating economic activity a key contribution of this study is to provide a formal test of the identifying restrictions commonly used in the literature

using stock returns to identify government spending shocks this article explores a new approach to identifying government spending shocks which avoids many of the shortcomings of existing approaches the new approach is to identify government spending shocks with statistical innovations to the accumulated excess returns of large us military contractors this strategy is used to estimate the dynamic responses of output hours consumption and real wages to a government spending shock we find that positive government spending shocks are associated with increases in output hours and consumption real wages initially decline after a government spending shock and then rise after a year we estimate the government spending multiplier associated with increases in military spending to be about 1 5 over a horizon of 5 years

the breakup of nations a political economy analysis this paper develops a model of the breakup or unification of nations in each nation the decision to separate is taken by majority voting a basic trade off between the efficiency gains of unification and the costs in terms of loss of control on political decisions is highlighted the model emphasizes political conflicts over redistribution policies the main results of the paper are i when income distributions vary across regions and the efficiency gains from unification are small separation occurs in equilibrium and ii when all factors of production are perfectly mobile all incentives for separation disappear i introduction following the demise of communism the entire map of europe from the atlantic coast to the urals is being redrawn and issues of separation unification and the redrawing of borders are yet again at the forefront of european concerns many of the issues raised by this process are primarily of a political cultural or linguistic nature however there are also economic considerations that bear on this problem the objective of this paper is to analyze some important economic and political determinants of the process of unification and separation of democratic nations the starting point of our analysis is to suppose that from an economic efficiency point of view separation of nations is never desirable a unified nation is always more efficient since free trade among regions is guaranteed duplication costs in defense and law enforcement are avoided and local public goods provision such as transportation and communication networks or common standards can be coordinated furthermore any benefits of decentralization that might be obtained in a world with several nations may also be achieved within a unified nation by replicating the administrative structure of the world with several

fiscal policy in an unemployment crisis this paper shows that large scal multipliers arise naturally from equilibrium unemployment dynamics in response to a shock that brings the economy into a liquidity trap an expansion in government spending increases output and causes a fall in the unemployment rate since movements in unemployment are persistent the eects of current spending linger into the future leading to an enduring rise in income as an enduring rise in income boosts private demand even a temporary increase in government spending sets in motion a virtuous employment spending spiral with a large associated multiplier this transmission mechanism contrasts with the conventional view in which scal policy may be ecacious only under a prolonged and committed rise in government spending which engineers a spiral of increasing ination

mobility and redistribution the ability of individuals to move freely from one jurisdiction to another is generally seen as a constraint on the amount of redistribution that each jurisdiction within a system of governments can undertake in this paper we look at this proposition by developing a positive analysis of income redistribution by local governments in a federal system we ask how much redistribution occurs when only local governments can have tax transfer instruments individuals can move freely among jurisdictions and voters in each jurisdiction are fully aware of the migration effects of redistributive policies local redistribution is shown to induce sorting of the population with the poorest households located in the communities that provide the most redistribution while the threat of out migration affects the potential for redistribution our results suggest that significant local redistribution is nonetheless feasible numerical computations indicate that the proportion of residents who are renters is a major factor affecting the local choice of level of redistribution

fiscal foresight and information flows news or foresight about future economic fundamentals can create rational expectations equilibria with non fundamental representations that pose substantial challenges to econometric efforts to recover the structural shocks to which economic agents react using tax policies as a leading example of foresight simple theory makes transparent the economic behavior and information structures that generate non fundamental equilibria econometric analyses that fail to model foresight will obtain biased estimates of output multipliers for taxes biases are quantitatively important when two canonical theoretical models are taken as data generating processes both the nature of equilibria and the inferences about the effects of anticipated tax changes hinge critically on hypothesized information flows different methods for extracting or hypothesizing the information flows are discussed and shown to be alternative techniques for resolving a non uniqueness problem endemic to moving average representations

economic integration and political disintegration in a world of trade restrictions large countries enjoy economic benefits because political boundaries determine the size of the market under free trade and global markets even relatively small cultural linguistic or ethnic groups can benefit from forming small homogeneous political jurisdictions this paper provides a formal model of the relationship between openness and the equilibrium number and size of countries and successfully tests two implications of the model firstly the economic benefits of country size are mediated by the degree of openness to trade secondly the history of nation state creations and secessions is influenced by the trade regime

can government purchases stimulate the economy this essay briefly reviews the state of knowledge about the government spending multiplier drawing on theoretical work aggregate empirical estimates from the united states as well as cross locality estimates i assess the likely range of multiplier values for the experiment most relevant to the stimulus package debate a temporary deficit financed increase in government purchases i conclude that the multiplier for this type of spending is probably between 0 8 and 1 5 jel e23 e62 h50

government purchases reloaded informational insufficiency and heterogeneity in fiscal vars using a large bayesian var we approximate the flow of information received by economic agents to investigate the effects of changes to government purchases we document robust evidence that informational insufficiency in conventional models explains inconsistent results across samples and commonly employed identifications in recursive structural vars and expectational vars furthermore we report heterogeneous effects of components of government purchases while aggregate government purchases do not appear to produce strong stimulative effects with output multiplier around 0 7 government investment components have multipliers well above unity state and local consumption which captures investment in education and health elicits a strong response

the political economy of regionalism we examine the incentives of regions to unite and separate separation allows for greater influence over the nature of political decision making while unification allows regions to exploit economies of scale in the provision of government our paper explores the influence of size location and the diversity within regions in shaping this trade off we then examine the way in which alternative political institutions aggregate regional preferences and thereby define the number of countries

how does government spending news affect interest rates evidence from the united states abstract this study analyzes the effects of news shocks to u s government spending on interest rates especially long term interest rates and investigates the role of agents expectations in the propagation of government spending to interest rates using large bayesian vector autoregressive models with sufficient information we find that news about increases in government spending induce significant increases in both short and long term interest rates while the effects of government spending surprise shocks on interest rates are mixed and ambiguous government spending news shocks in the baseline model account for around 10 of the variance in forecast errors in long term interest rates which is much more important than government spending itself using empirical dynamic term structural models we further decompose increases in long term interest rates into changes in expectations of future monetary policy and changes in term premiums we find that an increase in the long term interest rate after a positive government spending news shock mainly reflects higher expected future short term interest rates which demonstrates the importance of the coordination between fiscal and monetary policy communication

fiscal stimulus and systematic monetary policy postwar evidence for the united states abstract i provide structural var evidence that u s fiscal stimulus programs induce a systematic loosening of interest rates outside of zero lower bound episodes i characterize this policy easing by the fed as an indirect reaction to disinflationary dynamics unleashed by fiscal stimulus a finding i corroborate via taylor rule estimations the supporting monetary policy stance amplifies the impact of the expansion in public spending on gdp by roughly one third my evidence aligns with fiscal policy models featuring deep habits in consumption the empirical regularity of accommodating policy rates moreover questions the perception of stimulus being more effective when policy rates are stuck at zero

externalities vs internalities a model of political integration abstract decentralized government leads to inter regional externalities whereas an integrated jurisdiction solves the externality problem centralized government entails other costs in particular a neglect for minority interests the paper models formally the trade off between these two forces in determining the optimum as well as the equilibrium design of jurisdictions both the relative size of regions and the distribution of tastes are shown to be important parameters of the problem

sources of inefficiency in a representative democracy a dynamic analysis this paper studies the efficiency of policy choice in representative democracies it extends the citizen candidate model of democratic policy making to a dynamic environment equilibrium policy choices are shown to be efficient in the sense that in each period conditional on future policies being selected through the democratic process there exists no alternative current policy choices which can raise the expected utilities of all citizens however policies that would be declared efficient by standard economic criteria are not necessarily adopted in political equilibrium the paper argues that these divergencies are legitimately viewed as politicalfailures

a critique of tiebout s theory of local public expenditures the last section of this paper presents a rigorous version of tiebout s theory of local public goods it is shown that equilibria exist and are pareto optimal this rigorous theory follows closely the more rigorous part of tiebout s work this rigorous theory makes a number of very special assumptions which make local public goods essentially private the body of this paper presents a series of examples which show that if one tries to generalize the rigorous version of tiebout s theory in a number of interesting directions then equilibria may no longer exist or may not be pareto optimal the conclusion is that tiebout s idea does not lead to a satisfactory general theory of local public goods the goal of this paper is to point out that tiebout s notion of equilibrium with local governments does not have the nice properties of general competitive equilibrium except under very restrictive assumptions tiebout 39 suggested that there are competitive forces which tend to make local governments allocate resources in a pareto optimal fashion consumers choose to live in those towns with the mix of taxes and public goods they prefer local governments choose this mix so as to attract inhabitants this idea may seem intriguing for it suggests that the invisible hand solves an important part of samuelson s perplexing public goods problem 32 tiebout in fact makes an argument which is nearly rigorous i give a rigorous version of his argument at the end of the paper however in this rigorous version so many restrictive assumptions are made that public goods become essentially private in the body of the paper i give a series of examples with which i try to convince the reader that one is forced to adopt tiebout s restrictive assumptions the idea is that if one changes any of his assumptions then either equilibria may not exist or may not be pareto optimal my examples are presented in the context of a general class of tiebout models i consider several subclasses one of which is the special case considered by tiebout in each of the subclasses except that considered by tiebout i give a counterexample either to the existence of equilibrium or to its pareto optimality the subclasses are so chosen that the difficulties they reveal would be shared by any reasonable tiebout model which differed from his special case i believe that my examples controvert tiebout s suggestion 39 last paragraph that his theory compares favorably with competitive equilibrium theory most of the examples in this paper have already appeared in the literature i cite related work as i go along what is new here is that i assemble the examples in a unified argument

mafia and public spending evidence on the fiscal multiplier from a quasi experiment a law issued to combat political corruption and mafia infiltration of city councils in italy has resulted in episodes of large unanticipated temporary contractions in local public spending using these episodes as instruments we estimate the output multiplier of spending cuts at provincial level controlling for national monetary and fiscal policy and holding the tax burden of local residents constant to be 1 5 assuming that lagged spending is exogenous to current output brings the estimate of the overall multiplier up to 1 9 these results suggest that local spending adjustment may be quite consequential for local activity jel d72 e62 h71 k42 the widespread resort to fiscal stimulus at the onset of the global crisis and more recently the emerging need to consolidate deficits in response to rising fiscal imbalances have revitalized the empirical debate on the transmission of fiscal policy the multiplier while the literature has mostly focused on aggregate effects at a national level several recent contributions reviewed below have called attention to the local dimension this shift in focus is motivated by specific policy questions combined with the opportunity to exploit institutional information to address econometric issues in identification 1

tax multipliers pitfalls in measurement and identification abstract to analyze the pitfalls in measuring and identifying tax shocks we build a novel value added tax rate dataset for the period 1980 2009 the problem of identification i e changes in tax policy not triggered by output fluctuations is clearly disentangled from the problem of measurement i e finding a tax policy variable under the direct control of policymakers on the identification front our results favor the use of narratives a la romer and romer 2010 on the measurement front our findings support the use of tax rates as the true measure of tax policy as opposed to revenue based measures such as cyclically adjusted revenues

propagation mechanisms for government spending shocks a bayesian comparison the inability of a simple real business cycle model to predict a rise in consumption in response to increased government expenditures observed in many empirical studies has stimulated the development of alternative theories of government spending shocks using the bayesian approach we evaluate the quantitative performance of five extant models and find that neither of the considered transmission mechanisms for government spending helps improve the fit of the baseline model moreover we find that consumption decreases in all estimated models in response to a rise in government spending

coordinated action in local public goods models the case of secession without exclusion abstract this paper investigates threats of coordinated exit secession when coalitions cannot choose their members by exclusion this is modeled by a three stage noncooperative game in which voters choose a proportional tax rate and the level of public services and may choose to exit jointly a modified perfectly coalition proof nash concept is applied to rule out dynamically inconsistent threats and behavior by coalitions that is not self enforcing the major result is that cooption of potential seceding coalitions will not occur this result relies on the assumption that seceding coalitions cannot exclude potential members

is there a fiscal free lunch in a liquidity trap this paper uses a dsge model to examine the eects of an expansion in government spending in a liquidity trap the spending multiplier can be much larger than in the normal situation if the liquidity trap is very persistent and scal stimulus can be rapidly implemented moreover the budgetary costs may be minimal as the large response of output boosts tax revenues allowing for something close to a scal free lunch however we caution that the multiplier may be much smaller under plausible implementation lags for many types of public spending and or if the liquidity trap lasts less than two years in addition because the marginal impact of scal expansion decreases in the scale of the outlay it is crucial to distinguish between average and marginal multipliers

on the number and size of nations this paper studies the equilibrium determination of the number of countries in different political regimes and in different economic environments with more or less economic integration we focus on the trade off between the benefits of large jurisdictions and the costs of heterogeneity of large and diverse populations our model implies that i democratization leads to secessions ii in equilibrium one generally observes an inefficiently large number of countries iii the equilibrium number of countries is increasing in the amount of economic integration

what do british historical data tell us about government spending multipliers british data from the early 1700s through world war i reflect the results of numerous high quality natural experiments of government spending britain frequently participated in wars increasing military spending massively wartime distortions were relatively limited because the government generally adopted tax smoothing policy and rarely implemented interventions government spending multiplier estimates are low or negative and significantly below unity this paper finds no evidence that the multiplier was higher in the slack state than in the normal state jel e32 e62

fiscal shocks and their consequences this paper investigates the response of hours worked and real wages to fiscal policy shocks in the post world war ii us we identify these shocks with exogenous changes in military purchases and argue that they lead to a persistent increase in government purchases and tax rates on capital and labor income and a persistent rise in aggregate hours worked as well as declines in real wages the shocks are also associated with short lived rises in aggregate investment and small movements in private consumption we describe and implement a methodology for assessing whether standard neoclassical models can account for the consequences of a fiscal policy shock simple versions of the neoclassical model can account for the qualitative effects of a fiscal shock once we allow for habit formation and investment adjustment costs the model can also account reasonably well for the quantitative effects of a fiscal shock

the age specific burdens of short run fluctuations in government spending abstract we study the impact of government spending shocks on the distribution of income and wealth between cohorts and the associated welfare effects in a dynamic stochastic overlapping generations model with two types of households ricardian households and rule of thumb consumers we demonstrate that an unexpected increase in government spending decreases income and wealth inequality in contrast to the conventional wisdom that the financing of government expenditures by debt rather than taxes especially burdens young generations we find that debt financing also harms ricardian households during retirement the crucial element in our analysis is a wealth effect that results from the decline in the price of capital due to higher government debt

estimating fiscal multipliers news from a non linear world we estimate non linear vars to assess to what extent fiscal spending multipliers are countercyclical in the us we deal with the issue of non fundamentalness due to fiscal foresight by appealing to sums of revisions of expectations of fiscal expenditures this measure of anticipated fiscal shocks is shown to carry valuable information about future dynamics of public spending results based on generalised impulse responses suggest that fiscal spending multipliers in recessions are greater than one but not statistically larger than those in expansions however non linearities arise when focusing on extreme events that is deep recessions versus strong expansionary periods

chronicle of a war foretold the macroeconomic effects of anticipated defence spending shocks we identify us defense news shocks as shocks that best explain future movements in defense spending over a ve year horizon and are orthogonal to current defense spending our identied shocks are strongly correlated with the ramey 2011 news shocks but explain a larger share of macroeconomic uctuations and have signicant demand eects fiscal news induces signicant and persistent increases in output consumption investment hours and the interest rate standard dsge models fail to produce such a pattern we propose a sticky price model with distortionary taxation variable capital utilization capital adjustment costs and rule of thumb consumers that replicates the empirical ndings

government spending entry and the consumption crowding in puzzle this article documents empirically that net firm entry robustly rises after a u s government spending expansion we use this new finding to test the empirical validity of various model features that have been proposed to generate consumption crowding in after positive expenditure shocks endogenous entry models typically fail to generate the observed joint increase in consumption and entry model features that dampen the wealth effect such as rule of thumb households or complementarity between labor and consumption in preferences tend to reduce entry we show that utility or productivity enhancing public spending can reconcile the model with our documented fact and performs well empirically