Two Essays on Government Spending Shocks

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In the first chapter of my dissertation, I study the effects of an exogenous increase in government spending in models incorporating price and wage nominal rigidities. I find that the effects of price stickiness on the output multiplier depend crucially on the behavior of the monetary authority. If the monetary authority targets the nominal money growth rate, fiscal expansions the response of output is constrained by the nominal price rigidity. If the monetary authority targets the interest rate, fiscal expansions are accomodated by the monetary authority and result in higher output, inflation and higher wage rate. In the second chapter, I study two competing identifications on identifying fiscal shocks, which have been used in the literature. The first one is relying on war dates and was proposed by (Ramey et al. (1998)) and the second one is based on contempraneous restrictions, used by (Gali et al. (2006)) . The impulse responses from the first identification show that both consumption and real wages fall while the results from the second identification show that consumption and real wages rise. The first identification is consistent with the neoclassical model while the second cannot be easily reconciled with the current models of business cycles. Recently, (Ramey (2006)) has conjectured that the major difference between the two identifications is the timing and this alone should reconcile the results of the two identifications with the implicit result being that the neoclassical model is consistent with the evidence. This paper generates data from models and shows that Ramey's conjecture is generally not true in a broad class of neoclassical models and for broad ranges of parameter values. Timing alone cannot easily explain the difference between the two identifications

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  • 08/29/2018
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