Comparing alternative methodologies to estimate the effects of fiscal policy by Roberto Perotti
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Comparing alternative methodologies to estimate the effects of fiscal policyby Roberto Perotti
Discussant: Evi Pappa, UAB and CEPR
Problems in Empirically Identifying Fiscal Shocks
Interaction with Monetary Policy Shocks
Fiscal Policy endogeneity.
Predictability of Fiscal Shocks Nonfundamentalness.
Limited number of identifying restrictions supported by theory.
Existing methods for identifying fiscal shocks
Episodes school (Dummy variable):Rotemberg - Woodford (1992), Ramey- Shapiro (1999), Burnside et al.(2003), Cavallo (2003)
Ζero-identifying restrictions (SVAR):Blanchard-Perotti (2002), Gali et.al.(2003), Fatas and Mihov (2001)
Sign restrictions:Mountford and Uhlig (2003), Canova-Pappa (2003), Pappa(2005)
This paper: very important methodological contribution Compares Dummy with SVAR approach
Identifies the source of differences in results solves a puzzle
Poses a question for the responses of real wages after a fiscal shock
What I will do today?
I will add what is missing.
The sign restriction approach: ADVANTAGES No zero (conventional) short/ long run restrictions no identification acrobatics
All reduced form shocks have, in principle, information for structural shocks in every equation
no under-identification problem
Theory based restrictions fiscal shocks are allowed to affect all variables at the same time
no endogeneity problem
Restrictions in contemporaneous correlation matrix, no delay restrictions are used
no predictability problem
Theory based restrictions
+Deficits increase after a fiscal expansion contemporaneously
Data I used: all the same with Roberto except pc net taxes, I substitute with net government saving
Response of consumption after a G shock output
-0,05
0,00
0,05
0,10
0,15
0,20
0,25
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
private consumption
-0,04
-0,02
0,00
0,02
0,04
0,06
0,08
0,10
0,12
0,14
0,16
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Korean shock: cor(G,Y)>0, cor(G,DF)=0
consumption
-0,15
-0,10
-0,05
0,00
0,05
0,10
0,15
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
output
-0,10
-0,05
0,00
0,05
0,10
0,15
0,20
0,25
0,30
0,35
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
The labor markets: business sector compensation and hours
REAL WAGE
-0,15
-0,10
-0,05
0,00
0,05
0,10
0,15
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
HOURS
-0,20
-0,15
-0,10
-0,05
0,00
0,05
0,10
0,15
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
KOREAN shock identification: cor(G,Y)>0, cor(G,DF)=0
REAL WAGE
-0,15
-0,10
-0,05
0,00
0,05
0,10
0,15
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
HOURS
-0,15
-0,10
-0,05
0,00
0,05
0,10
0,15
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
The labor market: sample 1954:1 onwards
real wage
0,00
0,05
0,10
0,15
0,20
0,25
0,30
0,35
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
hours
-0,35
-0,30
-0,25
-0,20
-0,15
-0,10
-0,05
0,00
0,05
0,10
0,15
0,20
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Conclusions
Everybody should by now agree that:
Private consumption increases after a shock to government spending, but Korea
Hours increase after a shock to government spending Real wages seem to increase
But, for all sample and all identification schemes business sector compensation (BSC) moves insignificantly.
With SIGN approach, excluding Korean episode, also BSC increases significantly.
Question: Can NK model give a common explanations for Korean episode and SVAR and SIGN shocks?
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