NBER WORKING PAPER SERIES

AN EMPIRICAL CHARACTERIZATION
OF THE DYNAMIC EFFECTS OF
CHANGES IN GOVERNMENT
SPENDING AND TAXES
ON OUTPUT
Olivier Blanchard
Roberto Perotti
Working Paper 7269
http://www.nber.org/papers/w7269
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
July 1999
The views expressed herein are those of the authors and not necessarily those of the National Bureau of
Economic Research.
1999 by Olivier Blanchard and Roberto Perotti. All rights reserved. Short sections of text, not to exceed
two paragraphs, may be quoted without explicit permission provided that full credit, including notice, is
given to the source.
An Empirical Characterization of the Dynamic Effects
of Changes in Government Spending and Taxes on Output
Olivier Blanchard and Roberto Perotti
NBER Working Paper No. 7269
July 1999
JEL No. E62, E32
ABSTRACT
This paper characterizes the dynamic effects of shocks in government spending and taxes on
economic activity in the United States in the post-war period. It does so by using a mixed structural
VAR/event study approach. Identification is achieved by using 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.
The results consistently show positive government spending shocks as having a positive effect
on output, and positive tax shocks as having a negative effect. The multipliers for both spending and
tax shocks are typically small. Turning to the effects of taxes and spending on the components of
GDP, one of the results has a distinctly non-standard flavor: Both increases in taxes and increases in
government spending have a strong negative effect on investment spending.
Olivier Blanchard Roberto Perotti
Department of Economics Department of Economics
E52-373 Columbia University
MIT 420 W 118th St., 10th Floor
Memorial Drive New York, NY 10027
Cambridge, MA 02139 rp41@columbia.edu
and NBER
blanchar@mit.edu




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