Comparing alternative methodologies to estimate the effects of fiscal policyby Roberto Perotti

Discussant: Evi Pappa, UAB and CEPR

Problems in Empirically Identifying Fiscal Shocks

Interaction with Monetary Policy Shocks

Fiscal Policy endogeneity.

Predictability of Fiscal Shocks Nonfundamentalness.

Limited number of identifying restrictions supported by theory.

Existing methods for identifying fiscal shocks

Episodes school (Dummy variable):Rotemberg - Woodford (1992), Ramey- Shapiro (1999), Burnside et al.(2003), Cavallo (2003)

Ζero-identifying restrictions (SVAR):Blanchard-Perotti (2002), Gali et.al.(2003), Fatas and Mihov (2001)

Sign restrictions:Mountford and Uhlig (2003), Canova-Pappa (2003), Pappa(2005)

This paper: very important methodological contribution Compares Dummy with SVAR approach

Identifies the source of differences in results solves a puzzle

Poses a question for the responses of real wages after a fiscal shock

What I will do today?

I will add what is missing.

The sign restriction approach: ADVANTAGES No zero (conventional) short/ long run restrictions no identification acrobatics

All reduced form shocks have, in principle, information for structural shocks in every equation

no under-identification problem

Theory based restrictions fiscal shocks are allowed to affect all variables at the same time

no endogeneity problem

Restrictions in contemporaneous correlation matrix, no delay restrictions are used

no predictability problem

Theory based restrictions

+Deficits increase after a fiscal expansion contemporaneously

Data I used: all the same with Roberto except pc net taxes, I substitute with net government saving

Response of consumption after a G shock output

-0,05

0,00

0,05

0,10

0,15

0,20

0,25

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

private consumption

-0,04

-0,02

0,00

0,02

0,04

0,06

0,08

0,10

0,12

0,14

0,16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Korean shock: cor(G,Y)>0, cor(G,DF)=0

consumption

-0,15

-0,10

-0,05

0,00

0,05

0,10

0,15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

output

-0,10

-0,05

0,00

0,05

0,10

0,15

0,20

0,25

0,30

0,35

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

The labor markets: business sector compensation and hours

REAL WAGE

-0,15

-0,10

-0,05

0,00

0,05

0,10

0,15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

HOURS

-0,20

-0,15

-0,10

-0,05

0,00

0,05

0,10

0,15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

KOREAN shock identification: cor(G,Y)>0, cor(G,DF)=0

REAL WAGE

-0,15

-0,10

-0,05

0,00

0,05

0,10

0,15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

HOURS

-0,15

-0,10

-0,05

0,00

0,05

0,10

0,15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

The labor market: sample 1954:1 onwards

real wage

0,00

0,05

0,10

0,15

0,20

0,25

0,30

0,35

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

hours

-0,35

-0,30

-0,25

-0,20

-0,15

-0,10

-0,05

0,00

0,05

0,10

0,15

0,20

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Conclusions

Everybody should by now agree that:

Private consumption increases after a shock to government spending, but Korea

Hours increase after a shock to government spending Real wages seem to increase

But, for all sample and all identification schemes business sector compensation (BSC) moves insignificantly.

With SIGN approach, excluding Korean episode, also BSC increases significantly.

Question: Can NK model give a common explanations for Korean episode and SVAR and SIGN shocks?