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Permanent and temporary shocks to government spending: an empirical approach
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Cointegration between government spending and output is rarely considered in fiscal research. Motivated by this potential long run relationship, the paper focuses on separating temporary from permanent shocks to government spending using a SVECM. In particular,thisdecompositionrevealsthatgovernmentexpendituredataisindeedamixofstabilisationinterventions and responses to economic growth. The interpretation of these shocks is thenusedtoinfertheconsequencesoftemporaryincreasesingovernmentspending. Controlling for cointegration delivers results consistent with existent literature, yet the effects seem to be less persistent as the impact on output rapidly converges to zero.
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Fiscal policy Cointegration Structural VECM models Government spending shocks