A Second Thought on Estimating Expansionary Fiscal Policy Effects in the U.S.

This paper revisits mixed findings of the expansionary fiscal spending effect in the U.S. An array of standard Vector-Autoregressive (VAR) models have been implemented to capture inconsistent effects of the fiscal expansion across studies. Findings in this paper consistently reveal that, first, government expenditures often generate less positive influence than government purchases; second, leaving aside the state and local government spending, federal government purchases alone have a very limited influence on the economy; third, 2007 recession significantly weakened the effectiveness of fiscal expansionary policy thereafter. Following these findings, this paper questions the validity of using government purchases alone to conclude the comprehensive effect of fiscal expansion.