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Comparing alternative methodologies to estimate the effects of fiscal policy by Roberto Perotti

Comparing alternative methodologies to estimate the effects of fiscal policy by Roberto Perotti. Discussant: Evi Pappa, UAB and CEPR. Problems in Empirically Identifying Fiscal Shocks. Interaction with Monetary Policy Shocks Fiscal Policy endogeneity .

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Comparing alternative methodologies to estimate the effects of fiscal policy by Roberto Perotti

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  1. Comparing alternative methodologies to estimate the effects of fiscal policyby Roberto Perotti Discussant: Evi Pappa, UAB and CEPR

  2. 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.

  3. 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)

  4. 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

  5. What I will do today? I will add what is missing.

  6. 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

  7. Theory based restrictions +Deficits increase after a fiscal expansion contemporaneously

  8. Data I used: all the same with Roberto except pc net taxes, I substitute with net government saving

  9. Response of consumption after a G shock

  10. Korean shock: cor(G,Y)>0, cor(G,DF)=0

  11. The labor markets: business sector compensation and hours

  12. KOREAN shock identification: cor(G,Y)>0, cor(G,DF)=0

  13. The labor market: sample 1954:1 onwards

  14. 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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