A0798
Title: Estimating the effects of fiscal policy using a novel proxy shrinkage prior
Authors: Mathias Klein - Sveriges Riksbank (Sweden) [presenting]
Abstract: Different proxy variables commonly used in fiscal policy SVARs lead to contradicting conclusions, implying that some of the exogeneity assumptions may not be fulfilled. Data-driven identification is combined with a novel proxy shrinkage prior, which enables estimation of the effects of fiscal policy shocks without relying on strong assumptions about the validity of the proxy variables. The results suggest that increasing government spending is a more effective tool to stimulate the economy than reducing taxes. Additionally, evidence is provided that the commonly used proxies in the literature are endogenously related to structural shocks, which leads to biased estimates. New exogenous proxies that can be used in the traditional proxy VAR approach are constructed, resulting in similar estimates compared to the proxy shrinkage model.
