The Effects of Fiscal Policy Shocks: Evidence from a Bayesian SVAR Model With Uncertain Identifying Assumptions

Abstract

We explore the effects of fiscal policy shocks on aggregate output and inflation. We use the novel Bayesian econometric methodology of Baumeister and Hamilton applied to the fiscal structural vector autoregressive model to evaluate key elasticities and fiscal multipliers using U.S. data from 1947Q1 to 2023Q4. In our baseline specification, the government spending multiplier is equal to approximately 1.1 and tax multiplier is approximately -1.4 after one year. The short-term output elasticity of government spending is slightly negative and the output elasticity of taxes is approximately equal to 2.6.