We study the impact of shocks to different types of government spending on the sectoral composition of output for a panel of EMU member countries. We find that fiscal shocks lead to an increase in the relative size of the nontraded sector, with the impact varying across the different spending categories. There is typically no significant impact on the level of production in the tradables sector but the level of imports increases and the level of exports declines in most cases. Overall, the results show that fiscal shocks matter not only for aggregate variables but also for the sectoral composition of output. The sectoral output results are consistent with previous work concerning the impact of fiscal shocks on the real exchange rate and the relative price of nontradables.
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Alternative approaches to identification are not well suited for our purposes. The ‘narrative’ or ‘dummy variable’ approach developed by Ramey and Shapiro (1998) and latter implemented by Edelberg et al. (1999), Burnside et al. (2004) and Romer and Romer (2009) has focused on the U.S. case and would be difficult to implement for a multi-country panel. The ‘sign restriction’ approach implemented by Mountford and Uhlig (2008) and Canova and Pappa (2007) requires taking a strong stand on the predicted sign impact of fiscal shocks on the sectoral composition of output and the diversity of theoretical models does not support taking a strong stand on the sign of the response.
Ramey (2008) shows that fiscal policy in the U.S. may be anticipated one or two quarters in advance and that this produces qualitative changes in the responses of consumption and real wages.
To show this, Beetsma et al. (2006) estimate a panel VAR in public spending (g) and output (y) for seven EU countries with non-interpolated quarterly fiscal data assuming that g does not react to y within a quarter. From these results they construct an estimate of the response of public spending to output at annual frequency finding that it is not significantly different from zero. For further details on the plausibility of this assumption see Beetsma et al. (2009).
We thank George Tavlas for providing these data. The database has some missing entries. These are wage government consumption for Belgium between 1970 and 1975, Germany in 1970 and Portugal between 1970 and 1977. This last country also lacks data for total government consumption and government fixed investment for the same period, while Germany lacks total government consumption for 1970. Data from West Germany and Germany are combined by splicing growth rates in 1991.
Since all responses produced by this alternative Choleski ordering are similar to those previously presented, we do not report these figures.
To compute these differences we take the point estimates of the mean responses. We then test the statistical significance of these using the 1000 impulse responses produced by the Monte Carlo experiment used to derive the error bands.
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We thank an anonymous referee for helpful comments. This paper is part of an IRCHSS-sponsored research project on An Analysis of the Impact of European Monetary Union on Irish Macroeconomic Policy.
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Bénétrix, A.S., Lane, P.R. Fiscal Shocks and The Sectoral Composition of Output. Open Econ Rev 21, 335–350 (2010). https://doi.org/10.1007/s11079-009-9161-5
- Government spending shocks
- European Monetary Union
- Panel VAR