Essays on Fiscal Policy Effects on the Macroeconomy

Abstract

To explore fiscal policy effects on the macroeconomy, in this dissertation, I study the time-varying effects of government spending on private investment and investigate the aggregate and disaggregate public capital time-varying effects on private production in the U.S.; I also discuss government spending effects on output and income inequality in China. In the first essay, I investigate the time-varying effects of government spending on private investment in the U.S. for the time period spanning 1947-2018. I find strong evidence that fiscal spending has significant positive effects on private investment in the pre-1980s subsample, whereas it has negative effects in the post-1980s subsample. I build a DSGE model with fiscal considerations and featuring productive government spending in the production function to help understand these empirical results. The variation in estimated model parameters between the two subsamples, along with model-based counterfactual analysis, suggests that diminished productivity of government spending, shorter persistence of government spending together with different financing decisions are the prime determinants of the observed heterogeneity across time. In the second essay, I analyze the effects of public capital on private production under a vector autoregressive framework. Empirical results suggest that, first, the effects of public capital on the private economy are time-varying, in particular, the total effects of public capital on private output in the pre-1980 period is positive while in the post-1980 period the effects are insignificantly negative, and the public capital productivity diminishes across these two subsamples. Second, public capital presents crowding-in effects on private inputs before 1980 while it shows crowding-out effects on private inputs in recent decades. Accordingly, a decrease in public capital productivity might account for the different behaviors of the private sector. Third, I further study the disaggregate effects of the components of public capital on private production, and find that the aggregate time-varying public capital productivity may come from the productivity change in each component--productivity of the most components of public capital diminished from positive to non-positive across the subsamples, together with compositional change -- the decrease of the aggregate and disaggregate public capital as a proportion of GDP. In the third essay, I investigate the macroeconomic effects of government spending shocks on output and income inequality in China. I find that fiscal multipliers for the output in China are large: it is 2.08 at the 1-year horizon and 1.55 at the 4-year horizon. Meanwhile, as the government authorities spend an additional 1 RMB per capita, the urban-rural per capita disposable income ratio and Gini coefficient will decrease. This provides evidence that fiscal spending in China stimulates the economy while it reallocates the resources appropriately to deal with the income inequality issue, and consequently improves the average welfare of the entire population.