The Inflation Response to Government Spending Shocks: A Fiscal Price Puzzle?

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Standard

The Inflation Response to Government Spending Shocks: A Fiscal Price Puzzle? / Jørgensen, Peter Lihn; Ravn, Søren Hove.

I: European Economic Review, Bind 141, 103982, 2021.

Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › fagfællebedømt

Harvard

Jørgensen, PL & Ravn, SH 2021, 'The Inflation Response to Government Spending Shocks: A Fiscal Price Puzzle?', European Economic Review, bind 141, 103982. https://doi.org/10.1016/j.euroecorev.2021.103982

APA

Jørgensen, P. L., & Ravn, S. H. (2021). The Inflation Response to Government Spending Shocks: A Fiscal Price Puzzle? European Economic Review, 141, [103982]. https://doi.org/10.1016/j.euroecorev.2021.103982

Vancouver

Jørgensen PL, Ravn SH. The Inflation Response to Government Spending Shocks: A Fiscal Price Puzzle? European Economic Review. 2021;141. 103982. https://doi.org/10.1016/j.euroecorev.2021.103982

Author

Jørgensen, Peter Lihn ; Ravn, Søren Hove. / The Inflation Response to Government Spending Shocks: A Fiscal Price Puzzle?. I: European Economic Review. 2021 ; Bind 141.

Bibtex

@article{bfadec7b70e04c79916d803136fcabf7,
title = "The Inflation Response to Government Spending Shocks: A Fiscal Price Puzzle?",
abstract = "Standard New Keynesian models predict that expansionary fiscal policy is inflationary. In contrast, this paper presents empirical evidence that prices do not increase in response to a positive government spending shock. Instead, the response of prices is flat or even negative. This finding is robust across a wide range of specifications of our Structural Vector Autoregression (SVAR) model and across different price indices. The puzzling response of prices is accompanied by an increase in output and private consumption, as found in most of the existing literature, as well as an increase in Total Factor Productivity. We show that the introduction of variable technology utilization can enable an otherwise standard New Keynesian model to account for our empirical findings. The model implies that the government spending multiplier is substantially lower when the economy is in a fundamental liquidity trap, as compared to normal times, in contrast to the predictions of standard New Keynesian models.",
keywords = "Faculty of Social Sciences, Government Spending Shocks, Fiscal Policy, Business-cycle Comovement, DSGE Modelling, Endogenous Productivity, Government Spending Shocks, fiscal policy, Business-cycle Comovement, DSGE modeling, Endogenous Productivity",
author = "J{\o}rgensen, {Peter Lihn} and Ravn, {S{\o}ren Hove}",
year = "2021",
doi = "10.1016/j.euroecorev.2021.103982",
language = "English",
volume = "141",
journal = "European Economic Review",
issn = "0014-2921",
publisher = "Elsevier",

}

RIS

TY - JOUR

T1 - The Inflation Response to Government Spending Shocks: A Fiscal Price Puzzle?

AU - Jørgensen, Peter Lihn

AU - Ravn, Søren Hove

PY - 2021

Y1 - 2021

N2 - Standard New Keynesian models predict that expansionary fiscal policy is inflationary. In contrast, this paper presents empirical evidence that prices do not increase in response to a positive government spending shock. Instead, the response of prices is flat or even negative. This finding is robust across a wide range of specifications of our Structural Vector Autoregression (SVAR) model and across different price indices. The puzzling response of prices is accompanied by an increase in output and private consumption, as found in most of the existing literature, as well as an increase in Total Factor Productivity. We show that the introduction of variable technology utilization can enable an otherwise standard New Keynesian model to account for our empirical findings. The model implies that the government spending multiplier is substantially lower when the economy is in a fundamental liquidity trap, as compared to normal times, in contrast to the predictions of standard New Keynesian models.

AB - Standard New Keynesian models predict that expansionary fiscal policy is inflationary. In contrast, this paper presents empirical evidence that prices do not increase in response to a positive government spending shock. Instead, the response of prices is flat or even negative. This finding is robust across a wide range of specifications of our Structural Vector Autoregression (SVAR) model and across different price indices. The puzzling response of prices is accompanied by an increase in output and private consumption, as found in most of the existing literature, as well as an increase in Total Factor Productivity. We show that the introduction of variable technology utilization can enable an otherwise standard New Keynesian model to account for our empirical findings. The model implies that the government spending multiplier is substantially lower when the economy is in a fundamental liquidity trap, as compared to normal times, in contrast to the predictions of standard New Keynesian models.

KW - Faculty of Social Sciences

KW - Government Spending Shocks

KW - Fiscal Policy

KW - Business-cycle Comovement

KW - DSGE Modelling

KW - Endogenous Productivity

KW - Government Spending Shocks

KW - fiscal policy

KW - Business-cycle Comovement

KW - DSGE modeling

KW - Endogenous Productivity

U2 - 10.1016/j.euroecorev.2021.103982

DO - 10.1016/j.euroecorev.2021.103982

M3 - Journal article

VL - 141

JO - European Economic Review

JF - European Economic Review

SN - 0014-2921

M1 - 103982

ER -

ID: 284899086