What accounts for the changes in U.S. fiscal policy transmission?

Using vector autoregressions on U.S. time series for 1957-79 and 1983-2004, we find government spending shocks to have stronger effects on output, consumption, and wages in the earlier period. We try to account for this observation within a DSGE model featuring price rigidities and limited asset market participation. Specifically, we estimate the structural parameters of the model for both periods by matching impulse responses. Model-based counterfactual experiments suggest that most of the changes in fiscal policy transmission are accounted for by increased asset market participation and the more active monetary policy of the Volcker-Greenspan period. JEL codes: E21, E62, E63 Keywords: government spending, asset market participation, fiscal policy, monetary policy, DSGE, vector autoregression, minimum distance estimation.
ONE OF THE MOST PROMINENT ISSUES IN macroeconomics concerns the effects of an increase in government spending. The topic takes center stage in the policy debate and has received great [...]