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Title: Understanding the fiscal price puzzle: Evidence from a nonlinear VAR approach Authors:  Ngoc Trang Nguyen - Monash University (Australia) [presenting]
Abstract: Theoretical models predict that inflation increases in response to a positive government spending shock. However, many empirical studies provide evidence that a government spending shock is deflationary. Considering this gap, the purpose is to examine the impact of government spending shocks on prices in the US and how the effects differ at and away from the zero lower bound period using a parsimonious Interacted-VAR model. The decline in prices is persistent and significant in both states of the economy. During periods of active monetary policy, a fiscal spending innovation raises output on impact, whose effect dies down after about three years. Private consumption and output drop quickly in response to government spending shock and remain negative for most of the horizons before recovering slowly to pre-shock levels in presence of the zero constraint. Government spending multipliers under both regimes are high on impact and decrease to below one after one year. The multiplier in the normal state is more persistent and remains positive in the long run, while the multiplier in the ZLB state displays a quick drop and turns negative after two years, although the results indicate no statistical difference between the multipliers.