An empirical characterization of the dynamic effects of changes in government spending and taxes on output

This paper characterizes the dynamic effects of shocks in government spending and taxes on economic activity in the United States in the postwar period. It does so by using a structural VAR approach that relies on institutional information about the tax and transfer systems and the timing of tax collections to identify the automatic response of taxes and spending to activity, and, by implication, to infer fiscal shocks. One would have thought that such an exercise would have been carried out already. But, as far as we can tell, it has not. Of course, large-scale econometric models provide estimates of dynamic fiscal multipliers. Because of their very structure however, they largely postulate rather than document an effect of fiscal policy on activity. There exists also a large number of reduced-form studies. But these have typically concentrated either on the effects of some summary statistic of fiscal policy such as a cyclically adjusted deficit, or on spending, or on taxes. Most theories do not suggest however