Debt and the effects of fiscal policy
By: Carlo Favero, Francesco Giavazzi.
Contributors: Favero, Carlo.; Giavazzi,Francesco.; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 12822; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 12822.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "Empirical investigations of the effects of fiscal policy shocks share a common weakness: taxes, government spending and interest rates are assumed to respond to various macroeconomic variables but not to the level of the public debt; moreover the impact of fiscal shocks on the dynamics of the debt-to-GDP ratio are not tracked.  We analyze the effects of fiscal shocks allowing for a direct response of taxes, government spending and the cost of debt service to the level of the public debt.  We show that omitting such a feedback can result in incorrect estimates of the dynamic effects of fiscal shocks.  In particular the absence of an effect of fiscal shocks on long-term interest rates - a frequent finding in research based on VAR's that omit a debt feedback - can be explained by their mis-specification, especially over samples in which the debt dynamics appears to be unstable.  Using data for the U.S.  economy and the identification assumption proposed by Blanchard and Perotti (2002) we reconsider the effects of fiscal policy shocks correcting for these shortcomings"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 3/22/2007.

Includes bibliographical references.

Also available in print.

System requirements: Adobe Acrobat Reader.

Mode of access: World Wide Web.