ffects of fiscal shocks in a globalized world · 2014. 11. 18. · the contracting activity...
TRANSCRIPT
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EFFECTS OF FISCAL SHOCKS IN A GLOBALIZED WORLD
Alan Auerbach & Yuriy Gorodnichenko UC Berkeley
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MOTIVATION Key policy questions
• What is the size of the government spending multiplier? – Previous work: multiplier 1 (wide “confidence” bands)
• Does the size vary with the state of the economy? – Previous work: likely larger 1 in recessions & smaller 0 in expansions
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MOTIVATION Key policy questions
• What is the size of the government spending multiplier? – Previous work: multiplier 1 (wide “confidence” bands)
• Does the size vary with the state of the economy? – Previous work: likely larger 1 in recessions & smaller 0 in expansions
• How strong are fiscal spillovers, and what determines their strength?
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MOTIVATION Key policy questions
• What is the size of the government spending multiplier? – Previous work: multiplier 1 (wide “confidence” bands)
• Does the size vary with the state of the economy? – Previous work: likely larger 1 in recessions & smaller 0 in expansions
• How strong are fiscal spillovers, and what determines their strength? – A key channel of international transmission is the dynamics of the exchange rate
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MOTIVATION Key policy questions
• What is the size of the government spending multiplier? – Previous work: multiplier 1 (wide “confidence” bands)
• Does the size vary with the state of the economy? – Previous work: likely larger 1 in recessions & smaller 0 in expansions
• How strong are fiscal spillovers, and what determines their strength? – A key channel of international transmission is the dynamics of the exchange rate
Theory: Government spending ↑⇒ the domestic currency APPRECIATES
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MOTIVATION Key policy questions
• What is the size of the government spending multiplier? – Previous work: multiplier 1 (wide “confidence” bands)
• Does the size vary with the state of the economy? – Previous work: likely larger 1 in recessions & smaller 0 in expansions
• How strong are fiscal spillovers, and what determines their strength? – A key channel of international transmission is the dynamics of the exchange rate:
Theory: Government spending ↑⇒ the domestic currency APPRECIATES
Evidence: Government spending ↑⇒ the domestic currency DEPRECIATES
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CHALLENGES • Exchange rates are “jump” variables that can respond to news almost immediately
• Fiscal shocks are typically available at low frequency (quarterly or annual)
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CHALLENGES • Exchange rates are “jump” variables that can respond to news almost immediately
• Fiscal shocks are typically available at low frequency (quarterly or annual)
• Several issues:
• REVERSE CAUSALITY: fiscal variables can respond to developments in the FOREX market within a period.
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CHALLENGES • Exchange rates are “jump” variables that can respond to news almost immediately
• Fiscal shocks are typically available at low frequency (quarterly or annual)
• Several issues:
• REVERSE CAUSALITY: fiscal variables can respond to developments in the FOREX market within a period.
• TIMING: imprecise timing of innovations/news and so estimated responses to fiscal shocks may be attenuated.
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CHALLENGES • Exchange rates are “jump” variables that can respond to news almost immediately
• Fiscal shocks are typically available at low frequency (quarterly or annual)
• Several issues:
• REVERSE CAUSALITY: fiscal variables can respond to developments in the FOREX market within a period.
• TIMING: imprecise timing of innovations/news and so estimated responses to fiscal shocks may be attenuated.
• WEAK STATISTICAL POWER: We have only a handful of observations for ZLB, recessions, etc.
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CHALLENGES • Exchange rates are “jump” variables that can respond to news almost immediately
• Fiscal shocks are typically available at low frequency (quarterly or annual)
• Several issues:
• REVERSE CAUSALITY: fiscal variables can respond to developments in the FOREX market within a period.
• TIMING: imprecise timing of innovations/news and so estimated responses to fiscal shocks may be attenuated.
• WEAK STATISTICAL POWER: We have only a handful of observations for ZLB, recessions, etc.
OUR SOLUTION: USE DAILY INNOVATIONS IN GOVERNMENT SPENDING.
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DATA • Daily Statements of the U.S. Treasury
• Daily announcements of the U.S. Department of Defense about new contracts.
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DATA • Daily Statements of the U.S. Treasury
• Daily announcements of the U.S. Department of Defense about new contracts.
We focus on military spending:
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DATA • Daily Statements of the U.S. Treasury
• Daily announcements of the U.S. Department of Defense about new contracts.
We focus on military spending:
Lower sensitivity to the state of the economy
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DATA • Daily Statements of the U.S. Treasury
• Daily announcements of the U.S. Department of Defense about new contracts.
We focus on military spending:
Lower sensitivity to the state of the economy
Large domestic component of spending
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DATA • Daily Statements of the U.S. Treasury
• Daily announcements of the U.S. Department of Defense about new contracts.
We focus on military spending:
Lower sensitivity to the state of the economy
Large domestic component of spending
Long time series (start in 1994)
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DATA • Daily Statements of the U.S. Treasury
• Daily announcements of the U.S. Department of Defense about new contracts.
We focus on military spending:
Lower sensitivity to the state of the economy
Large domestic component of spending
Long time series (start in 1994)
Smaller predictable component (e.g., seasonality) at daily frequency
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DATA • Daily Statements of the U.S. Treasury
• Daily announcements of the U.S. Department of Defense about new contracts.
We focus on military spending:
Lower sensitivity to the state of the economy
Large domestic component of spending
Long time series (start in 1994)
Smaller predictable component (e.g., seasonality) at daily frequency
Major source of variation
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DAILY DEFENSE VENDOR PAYMENTS
010
0020
0030
0040
00D
efen
se V
endo
r Pay
men
ts, M
il $
01jan1995 01jan2000 01jan2005 01jan2010 01jan2015
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QUARTERLY TOTALS OF DAILY DEFENSE VENDOR PAYMENTS
2040
6080
100
120
Billi
on $
01jan1995 01jan2000 01jan2005 01jan2010 01jan2015
Defense Vendor Payments, quarterly totalNIPA Defense: Intermed. goods&serv. purchased + Gross Invest.
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DEPARTMENT OF DEFENSE (DOD)ANNOUNCEMENTS Almost every day at 5pm, DoD announces new contract awards greater than $6.5 mil.
http://www.defense.gov/contracts/
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DEPARTMENT OF DEFENSE (DOD)ANNOUNCEMENTS Almost every day at 5pm, DoD announces new contract awards greater than $6.5 mil.
http://www.defense.gov/contracts/
This is an example of a contract awarded on July 28, 2014:
SAIC, McLean, Virginia, was awarded an $89,526,485 cost-plus-incentive fee, incrementally- funded contract with options, for management and technical support for high performance computing services, capabilities, infrastructure, and technologies. Work will be performed at Wright-Patterson Air Force Base, Ohio; Aberdeen Proving Ground, Maryland; Stennis Space Center, Mississippi; Vicksburg, Mississippi; Kihei, Hawaii; Lorton, Virginia; and McLean, Virginia, with an estimated completion date of July 28, 2019. Bids were solicited via the Internet with four received. Research, development, testing and evaluation fiscal 2013 ($18,230,430) and fiscal 2014 ($5,770,000) funds are being obligated at the time of the award. U.S. Army Corps of Engineers, Huntsville, Alabama, is the contracting activity (W912DY-14-F-0103).
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DEPARTMENT OF DEFENSE (DOD)ANNOUNCEMENTS Almost every day at 5pm, DoD announces new contract awards greater than $6.5 mil.
http://www.defense.gov/contracts/
This is an example of a contract awarded on July 28, 2014:
SAIC, McLean, Virginia, was awarded an $89,526,485 cost-plus-incentive fee, incrementally- funded contract with options, for management and technical support for high performance computing services, capabilities, infrastructure, and technologies. Work will be performed at Wright-Patterson Air Force Base, Ohio; Aberdeen Proving Ground, Maryland; Stennis Space Center, Mississippi; Vicksburg, Mississippi; Kihei, Hawaii; Lorton, Virginia; and McLean, Virginia, with an estimated completion date of July 28, 2019. Bids were solicited via the Internet with four received. Research, development, testing and evaluation fiscal 2013 ($18,230,430) and fiscal 2014 ($5,770,000) funds are being obligated at the time of the award. U.S. Army Corps of Engineers, Huntsville, Alabama, is the contracting activity (W912DY-14-F-0103).
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DEPARTMENT OF DEFENSE (DOD)ANNOUNCEMENTS Almost every day at 5pm, DoD announces new contract awards greater than $6.5 mil.
http://www.defense.gov/contracts/
This is an example of a contract awarded on July 28, 2014:
SAIC, McLean, Virginia, was awarded an $89,526,485 cost-plus-incentive fee, incrementally- funded contract with options, for management and technical support for high performance computing services, capabilities, infrastructure, and technologies. Work will be performed at Wright-Patterson Air Force Base, Ohio; Aberdeen Proving Ground, Maryland; Stennis Space Center, Mississippi; Vicksburg, Mississippi; Kihei, Hawaii; Lorton, Virginia; and McLean, Virginia, with an estimated completion date of July 28, 2019. Bids were solicited via the Internet with four received. Research, development, testing and evaluation fiscal 2013 ($18,230,430) and fiscal 2014 ($5,770,000) funds are being obligated at the time of the award. U.S. Army Corps of Engineers, Huntsville, Alabama, is the contracting activity (W912DY-14-F-0103).
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DEPARTMENT OF DEFENSE (DOD)ANNOUNCEMENTS Almost every day at 5pm, DoD announces new contract awards greater than $6.5 mil.
http://www.defense.gov/contracts/
This is an example of a contract awarded on July 28, 2014:
SAIC, McLean, Virginia, was awarded an $89,526,485 cost-plus-incentive fee, incrementally- funded contract with options, for management and technical support for high performance computing services, capabilities, infrastructure, and technologies. Work will be performed at Wright-Patterson Air Force Base, Ohio; Aberdeen Proving Ground, Maryland; Stennis Space Center, Mississippi; Vicksburg, Mississippi; Kihei, Hawaii; Lorton, Virginia; and McLean, Virginia, with an estimated completion date of July 28, 2019. Bids were solicited via the Internet with four received. Research, development, testing and evaluation fiscal 2013 ($18,230,430) and fiscal 2014 ($5,770,000) funds are being obligated at the time of the award. U.S. Army Corps of Engineers, Huntsville, Alabama, is the contracting activity (W912DY-14-F-0103).
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DEPARTMENT OF DEFENSE (DOD) ANNOUNCEMENTS: DAILY TOTALS
050
0010
000
1500
020
000
2500
0C
ontra
cts
awar
ded
by D
oD, d
aily
tota
l, M
il $
01jan1995 01jan2000 01jan2005 01jan2010 01jan2015
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DEPARTMENT OF DEFENSE (DOD) ANNOUNCEMENTS: MONTHLY TOTALS
9/11
Iraq II
Russo-Georgian
warOperationNewDawn
010
000
2000
030
000
4000
050
000
Mil
$
01jan1995 01jan2000 01jan2005 01jan2010 01jan2015
New contracts awarded by DoD, monthly totalDefense Vendor Payments, monthly total
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WHAT IS A SHOCK?
Three types of shocks at daily frequency in our data:
LEVEL SHOCK: news about the level of resources spent or committed for spending
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WHAT IS A SHOCK?
Three types of shocks at daily frequency in our data:
LEVEL SHOCK: news about the level of resources spent or committed for spending
TIMING SHOCK: news about the allocation of pre-committed amount of resources over time (spend money in April or May)
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WHAT IS A SHOCK?
Three types of shocks at daily frequency in our data:
LEVEL SHOCK: news about the level of resources spent or committed for spending
TIMING SHOCK: news about the allocation of pre-committed amount of resources over time (spend money in April or May)
IDENTITY SHOCK: announcements resolve uncertainty about who is going to do a contract (“Lockheed” or “Boeing”) but, at the aggregate level, the announcements do not reveal new information about timing or level of spending.
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WHAT IS A SHOCK?
Three types of shocks at daily frequency in our data:
LEVEL SHOCK: news about the level of resources spent or committed for spending
TIMING SHOCK: news about the allocation of pre-committed amount of resources over time (spend money in April or May)
IDENTITY SHOCK: announcements resolve uncertainty about who is going to do a contract (“Lockheed” or “Boeing”) but, at the aggregate level, the announcements do not reveal new information about timing or level of spending.
Question: Information content of innovations in actual and announced defense spending?
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WHAT IS A SHOCK?
Three types of shocks at daily frequency in our data:
LEVEL SHOCK: news about the level of resources spent or committed for spending
TIMING SHOCK: news about the allocation of pre-committed amount of resources over time (spend money in April or May)
IDENTITY SHOCK: announcements resolve uncertainty about who is going to do a contract (“Lockheed” or “Boeing”) but, at the aggregate level, the announcements do not reveal new information about timing or level of spending.
Question: Information content of innovations in actual and announced defense spending?
Strategy: Examine responses of stock prices of defense contractors to these innovations.
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RESPONSES OF DEFENSE/AEROSPACE INDEX TO A SHOCK IN SPENDING DOD ANNOUNCEMENTS DAILY PAYMENTS TO DEFENSE CONTRACTORS
-.000
50
.000
5.0
01
0 10 20 30horizon
IRF 95% confidence interval
Defense and Aerospace index
-.004
-.002
0.0
02.0
04
0 10 20 30horizon
IRF 95% confidence interval
Defense and Aerospace index
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RESPONSE OF TRADE-WEIGHTED EXCHANGE RATE DOD ANNOUNCEMENTS DAILY PAYMENTS TO DEFENSE CONTRACTORS
0.0
005
.001
exch
ange
rate
resp
onse
0 10 20 30horizon
IRF 95% confidence interval
-.004
-.002
0.0
02.0
04ex
chan
ge ra
te re
spon
se
0 10 20 30horizon
IRF 95% confidence interval
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RESPONSE OF TRADE-WEIGHTED EXCHANGE RATE DOD ANNOUNCEMENTS DAILY PAYMENTS TO DEFENSE CONTRACTORS
Economic magnitude:
Double defense contracts (+2% of GDP) ⇒ the dollar appreciates by 12%.
0.0
005
.001
exch
ange
rate
resp
onse
0 10 20 30horizon
IRF 95% confidence interval
-.004
-.002
0.0
02.0
04ex
chan
ge ra
te re
spon
se
0 10 20 30horizon
IRF 95% confidence interval
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PROPAGATION Possible channels of how government spending shocks can spill over to other countries:
Increased demand
o Interest rates rise
o Inflation expectations rise
o Stock markets in foreign countries rise
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PROPAGATION Possible channels of how government spending shocks can spill over to other countries:
Increased demand
o Interest rates rise Yes
o Inflation expectations rise Yes
o Stock markets in foreign countries rise Yes
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PROPAGATION Possible channels of how government spending shocks can spill over to other countries:
Increased demand
o Interest rates rise Yes
o Inflation expectations rise Yes
o Stock markets in foreign countries rise Yes
Increased liquidity risk (TED spread)
Increased commodity price prices (e.g., oil)
Increased risk (VIX)
Shocks correlated with monetary policy
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PROPAGATION Possible channels of how government spending shocks can spill over to other countries:
Increased demand
o Interest rates rise Yes
o Inflation expectations rise Yes
o Stock markets in foreign countries rise Yes
Increased liquidity risk (TED spread) No
Increased commodity price prices (e.g., oil) No
Increased risk (VIX) No
Shocks correlated with monetary policy No
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TIME VARIATION IN THE RESPONSE OF THE EXCHANGE RATE PRE-GREAT RECESSION BINDING ZERO LOWER BOUND
-.000
50
.000
5.0
01ex
chan
ge ra
te re
spon
se
0 10 20 30horizon
IRF 95% confidence interval
DoD announcements
-.001
0.0
01.0
02ex
chan
ge ra
te re
spon
se
0 10 20 30horizon
IRF 95% confidence interval
DoD announcements
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TIME VARIATION IN THE RESPONSE OF THE EXCHANGE RATE
Rolling regressions, window = 24 months ( 500 observations).
-.001
-.000
50
.000
5.0
01.0
015
cont
emp.
exc
hang
e ra
te re
spon
se
1995 2000 2005 2010 2015
IRF 95% confidence interval
DoD announcements
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STATE-DEPENDENT RESPONSE OF THE EXCHANGE RATE
-.008
-.006
-.004
-.002
0.0
02.0
04.0
06ex
chan
ge ra
te re
spon
se
0 10 20 30horizon
Expansion Recession95% CI 95% CI
Binding ZLB
-.002
-.001
0.0
01.0
02.0
03.0
04ex
chan
ge ra
te re
spon
se
0 10 20 30horizon
Expansion Recession95% CI 95% CI
Non-binding ZLB
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CONCLUDING REMARKS
Spillovers of fiscal shocks critically depend on the response of the exchange rate.
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CONCLUDING REMARKS
Spillovers of fiscal shocks critically depend on the response of the exchange rate.
A long-standing puzzle in the data: a government spending shock depreciates the domestic currency.
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47
CONCLUDING REMARKS
Spillovers of fiscal shocks critically depend on the response of the exchange rate.
A long-standing puzzle in the data: a government spending shock depreciates the domestic currency.
We resolve by puzzle by using high frequency data on government spending: o Improve timing of shocks and responses to shocks o Distinguish between actual spending and announced spending
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48
CONCLUDING REMARKS
Spillovers of fiscal shocks critically depend on the response of the exchange rate.
A long-standing puzzle in the data: a government spending shock depreciates the domestic currency.
We resolve by puzzle by using high frequency data on government spending: o Improve timing of shocks and responses to shocks o Distinguish between actual spending and announced spending
The transmission is tentatively in line with the predictions of modern and classical models.
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49
CONCLUDING REMARKS
Spillovers of fiscal shocks critically depend on the response of the exchange rate.
A long-standing puzzle in the data: a government spending shock depreciates the domestic currency.
We resolve by puzzle by using high frequency data on government spending: o Improve timing of shocks and responses to shocks o Distinguish between actual spending and announced spending
The transmission is tentatively in line with the predictions of modern and classical models.
There is some evidence that the response of the exchange rate to government spending shocks is time-varying and state-dependent.