Scandinavian Working Papers in Economics

Nationaløkonomisk tidsskrift,
Nationaløkonomisk Forening

Fiscal Expenditure Shocks in a Structural VAR and ADAM

2018, Volume 2018, issue 1, pp. 25

Peter Agger Troelsen ()

Abstract: We compare temporary fiscal expenditure shocks in ADAM to a SVAR using impulse response analysis of the following variables; the real wage, the unemployment rate, private consumption, and a measure of foreign trade. Our primary focus is the difference of the models with respect to crowding out time and dynamics of the unemployment rate. We find that ADAM crowds out the initial unemployment response at least as fast as the SVAR. If we finance the fiscal expansion via income taxes in ADAM, the crowding out process becomes even faster. In general, the dynamics of ADAMs variables are within the statistical uncertainty of the SVAR, and in that sense the models behave alike. As a robustness check, we compare ADAM to the SVAR in Ravn and Spange (2014), which focuses on GDP instead of unemployment; this comparison confirms our conclusion on ADAMs crowding out time. We also note that the SVAR analysis does not indicate a strictly positive reaction in private consumption to an expansionary fiscal shock, suggesting that expenditure shocks are tax-financed or that consumers are partly Ricardian. Based on our study, we argue that ADAMs crowding out time should not be reduced.

Keywords: Fiscal Expenditure Shocks; Model Benchmarking; ADAM

JEL-codes: C01; E12; E17; E62

Language: English

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