Abstract

This paper examines the evolution of the effects of government spending shocks in the post-war U.S. The shocks are identified using the recursive and sign restriction approaches in a time-varying parameter vector autoregressive (TVP-VAR) model with stochastic volatility. The results show that government spending multipliers declined substantially in the 1980s and 1990s. A crowding-in of consumption and a depreciation of the real exchange rate are observed after a government spending increase, but the former disappears in the 1990s. Applying the methodology employed by Canzoneri, Cumby, and Diba (2001) to the TVP-VAR framework, we find that the degree of Ricardian behavior of the government has been strengthened since the late 1970s. While monetary and fiscal policy interaction is shown to have a dampening effect on multipliers, the accumulation of government debt during the period is suggested to be the major driving force behind the decline in multipliers.