Explaining the Effects of Government Spending Shocks on Consumption and the Real Exchange Rate. M. Ravn S. Schmitt-Grohé M. Uribe.

Transcription

1 Explaining the Effects of Government Spending Shocks on Consumption and the Real Exchange Rate M. Ravn S. Schmitt-Grohé M. Uribe November 2, 27

2 Effects of Government Spending Shocks: SVAR Evidence A rise in government spending leads to An increase in private consumption. (Fatás and Mihov, 2; Blanchard and Perotti, 22; Gaĺı et al., 27; Perotti, 27.) A real exchange rate depreciation. (Monacelli and Perotti, 26.) An increase in output and wages (Rotemberg and Woodford, 992; Blanchard and Perotti, 22; Perotti, 27.) A trade balance deterioration. (Corsetti and Müller, 26; Monacelli and Perotti, 26.) 2

3 This Paper produces SVAR evidence using a panel approach. To gain efficiency To obtain a single benchmark against which to evaluate theoretical explanations. presents a theoretical explanation of the observed effects of government spending shocks on consumption, the real exchange rate, output, and the trade balance based on the deep-habit mechanism. 3

4 Effects of Government Spending Shocks: Evidence from the Narrative Approach In response to a rise in government spending Output increases. Consumption fails to increase. Wages fail to rise. (Ramey and Shapiro, 998; Burnside, Eichenbaum, and Fisher, 24; Ramey, 26) 4

5 Estimation of Impulse Responses to a Government Spending Shock The Structural VAR Model AX t = B(L)X t + ɛ t where X t = [ log g t log y t log c t nx t y t log e t ] Identification: Government spending is not affected contemporaneously by structural innovations to any variable other than government spending itself. Panel of Countries: Australia, Canada, U.K., and U.S. Sample: Quarterly data from 975Q to 25Q4. 4 lags. 5

6 Estimated Impulse Response Functions To A Unit Innovation in Domestic Government Purchases g t.3 y t c t.5.5. nxy t rer t Point estimate Point estimate ± 2std

7 Habit Formation Period Utility Function: U(x t, h t ) Superficial Habit Formation: x t = c t θ c t with c t = [ c it η di ] η Implied Demand Functions: c it = ( P it P t ) η xt Deep Habit Formation: x t = [ ( cit θ c it ) η di ] η Implied Demand Functions: c it = ( P it P t ) η xt + θ c it 7

8 A Two-Country Model of Pricing to Habits Production economy without capital. Preferences E t= β t [φ ln(x t ) + ( φ) ln( h t )] Two goods: a and b x t = [ ωx c a,t ξ + ( ω)x c b,t ] ξ ξ 8

9 Habit-adjusted consumption of good a x c a,t = [ (c i,a,t θ c s c i,a,t ) ] η di η s c i,a,t = ρsc i,a,t + ( ρ) c i,a,t Habit-adjusted consumption of good b x c b,t = [ (c i,b,t θ c s c i,b,t ) ] η di η s c i,b,t = ρsc i,b,t + ( ρ) c i,b,t 9

10 The Public sector x g a,t = [ max χ(x g a,t, xg b,t ) (g i,a,t θ g s g i,a,t ) s g i,a,t = ρsg i,a,t + ( ρ)g i,a,t x g b,t = [ (g i,b,t θ g s g i,b,t ) s g i,b,t = ρsg i,b,t + ( ρ)g i,b,t ] η di η ] η di η (P i,a,tg i,a,t + P i,b,t g i,b,t )di = P y t g t

11 Domestic Demand for good a ( ) η Pi,a,t d i,a,t = x a,t + θs i,a,t P a,t Price elasticity = η ( θ s i,a,t d i,a,t ) Foreign Demand for good a d i,a,t = P i,a,t Pa,t η x a,t + θs i,a,t Price elasticity = η θ s i,a,t d i,a,t

12 Firms Firms can price discriminate internationally. Production Function: y i,a,t = h i,a,t Optimal pricing P a,t = ( η θ d a,t d a,t ) + θω a,t MC t P a,t = ( η θ d a,t d a,t ) + θω a,t MC t 2

13 The Real Exchange Rate Domestic price index: P t = γp a,t + ( γ)p b,t Foreign price index: P t = ( γ)p a,t + γp b,t Real exchange rate, e t = P t P t = f ( P a,t P a,t, P b,t P b,t, + + ± P ) b,t P a,t 3

14 Calibration Parameter Value Description β.99 Subjective discount factor (quarterly) φ.5 Preference parameter ω.5 Preference parameter ξ.5 Elasticity of substitution composite η 5 Elasticity of substitution varieties s g, s g.2 Government shares The Driving Force ĝ t = B (L) ĝ t ŷ t ĉ t nxy t ê t + ɛ t 4

15 Estimation Goal: Estimate deep-habit parameters: Θ [θ c θ g ρ] Strategy: Pick Θ to minimize the distance between empirical and theoretical impulse responses of five variables. Estimated Parameters Point Standard Parameter Estimate Deviation θ c.52.8 θ g.57.5 ρ

16 Predicted and Estimated Impulse Responses g t.3 y t c t.5.5. nxy t rer t.5 Data Data ± 2std x x Deep Habits

17 Response of the Domestic and Foreign Markups to a One-Percent Government Spending Shock..5 Foreign Markup Percent deviation from trend Domestic Markup Quarters after the shock 7

18 Response of the Real Wage to a Government Spending Shock.3.25 Percent deviation from trend Domestic Wage.5 Foreign Wage Quarters after the shock 8

19 Response of the Real Exchange Rate to a Government Spending Shock.2 Percent deviation from trend Data +2 std Data Deep Data 2 std Superficial Quarters after the shock 9

20 Response of Private Consumption to a Government Spending Shock.2 Data +2 std.5 Percent deviation from trend..5 Data Deep Data 2 std Superficial Quarters after the shock 2

21 Anticipated Government Spending Shocks ln ( ) gt ḡ = ρ g ln ( ) gt ḡ + ɛ t + ɛ 2 t 2 ρ g =.87 2

22 Impulse Responses To a Two-Period Anticipated Innovation in Government Spending g t c t rer t. domestic markup product wage Unanticipated Shock Anticipated Shock

23 Sensitivity Analysis: Home Bias and Less Persistent Habit Stock.2 rer t.2 c t x-x-x-: Baseline -o-o-o: Home bias, ω =.7 : Less persistence, ρ =.87 23

24 Observed and Predicted Impulse Responses: HP Filtered Data g t.2 y t c t. nxy t rer t

25 Conclusions Pricing to Habits can account quantitatively for the empirical regularity that in response to an unanticipated demand shock private consumption rises the real exchange rate depreciates the trade balance deteriorates At the same time, Pricing to Habits can account for the empirical regularity that in response to an anticipated demand shock private consumption fails to rise on impact real product wages fails to rise on impact 25

26 Extras 26

27 Country-by-Country Regressions 27

28 .5 g t Australia y t c t.2.. nxy t rer t

29 .5 g t Canada...2 y t c t.3.2. nxy t rer t

30 g t United Kingdom.3.2. y t c t.2.. nxy t rer t

31 g t United States y t c t.5..5 nxy t rer t

32 Montecarlo Experiment g t.3 y t c t.5.5. nxy t rer t Point estimate o Median Montecarlo Point estimate ± 2std