Fiscal shocks and asymmetric effects: a comparative analysis

TL;DR

This paper empirically investigates the asymmetric effects of unanticipated fiscal policy shocks on U.S. economic growth and cycles from 1967 to 2011, using innovative support vector machines alongside traditional methods.

Contribution

It introduces the novel application of support vector machines to extract fiscal shocks in macroeconomic analysis and compares robustness across different monetary aggregates.

Findings

Asymmetric effects of fiscal shocks on output are identified.

Support vector machines provide a new approach for shock extraction.

Fiscal shocks have varying impacts depending on their sign and type.

Abstract

We empirically test the effects of unanticipated fiscal policy shocks on the growth rate and the cyclical component of real private output and reveal different types of asymmetries in fiscal policy implementation. The data used are quarterly U.S. observati ons over the period 1967:1 to 2011:4. In doing so, we use both a vector autoregressive and the novel support vector machines systems in order to extract the fiscal policy shocks series. The latter has never been used before in a similar macroeconomic setting. Within our research framework, in order to test the robustness of our results to alternative aggregate money supply definitions we use two alternative moentary aggregates. These are the commonly reported by central banks and policy makers simple sum monetary aggregates at the MZM level of aggregation and the alternative CFS Divisia MZM aggregate. From each of these four systems we extracted four types of shocks: a negative and a positive government spending shock and a negative and a positive government revenue shock. These eight different types of unanticipated fiscal policy shocks are next used to empirically examine their effects on the growth rate and the cyclical component of real private GNP in two sets of regressions: one that assumes only contemporaneous effects of the shocks on output and one that is augmented with four lags of each fiscal shock.