Access Type

Open Access Dissertation

Date of Award

January 2014

Degree Type

Dissertation

Degree Name

Ph.D.

Department

Economics

First Advisor

Robert J. Rossana

Abstract

Fiscal policy is investigated in two settings. First, a fully identified neoclassical growth model with rich fiscal policy rules is augmented with non-Ricardian consumers and fit to post-war U.S. data using Bayesian techniques. Allowing transfer payments to directly affect the consumption choices of rule-of-thumb agents permits a new interpretation of time series evidence regarding which fiscal instruments have historically financed government debt. The economic impact of fiscal adjustments is studied for two labor supply specifications. The first specification restricts labor supply by equalizing hours worked across household types. The second relaxes this assumption, allowing for intratemporal optimization by non-Ricardian households. With respect to previous findings, capital and labor taxes are more important for debt stabilization while transfers play a smaller role. Capital taxes and transfers play a larger role in output stabilization.

Second, I explore the effects of anticipated policy changes. If agents are rational, they will incorporate news about future spending changes before they are enacted. I collected Federal Reserve forecasts for the period 1965 - 2005 from online archives of FOMC meetings. I incorporate the forecasts as a measure of anticipated military spending to identify government spending shocks in a VAR. When the raw forecasts are used I find that GDP, hours, wages, and consumption all rise following a shock to the news variable. When I instead incorporate forecast errors in the VAR I find just the opposite: hours increase while wages and consumption fall after a government spending shock, as is typical with the narrative approach to identifying government spending shocks, pioneered Ramey and Shapiro (1997). Thus, the way in which the forecast data is incorporated into the VAR becomes crucially important to the results. Corroborating evidence is sought using a structural model designed to study fiscal policy.

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