California Accepted Papers Paper:
Identifying the Effects of Government Spending Shocks with Credit Cycle
*Names in bold indicate Presenter
Identifying the effects of fiscal spending shocks has been one of the most lively debates
among macroeconomists since the Great Recession. The main finding of the burgeoning
literature on this topic is that the fiscal spending shocks are more potent in recession than
expansion. However, most results have been estimated with paying less attention to credit
states, although real economic variables have become increasingly correlated with financial
variables. Based on this observation, we extract government spending shocks with real
credit data as well as conventional real variables. These new shocks generate similar
responses of the variables at shorter horizons as in the literature. Still, the effectiveness
vanishes sharply compared to the government spending shocks without controlling the
credit. We show that while the government spending shocks are effective on impact with
the output multiplier of 1.06, it drops to 0.4 at the one-year horizon. Next, we estimate
fiscal multipliers based on the credit cycle. The on-impact output multiplier is 1.85 in the
credit recession and 0.92 outside of it. They also increase to 2.16 in the credit downturn
and around 1 in the expansion at a one-year horizon, respectively. The results seem robust
to alternative model specifications.
among macroeconomists since the Great Recession. The main finding of the burgeoning
literature on this topic is that the fiscal spending shocks are more potent in recession than
expansion. However, most results have been estimated with paying less attention to credit
states, although real economic variables have become increasingly correlated with financial
variables. Based on this observation, we extract government spending shocks with real
credit data as well as conventional real variables. These new shocks generate similar
responses of the variables at shorter horizons as in the literature. Still, the effectiveness
vanishes sharply compared to the government spending shocks without controlling the
credit. We show that while the government spending shocks are effective on impact with
the output multiplier of 1.06, it drops to 0.4 at the one-year horizon. Next, we estimate
fiscal multipliers based on the credit cycle. The on-impact output multiplier is 1.85 in the
credit recession and 0.92 outside of it. They also increase to 2.16 in the credit downturn
and around 1 in the expansion at a one-year horizon, respectively. The results seem robust
to alternative model specifications.
