WAGE MODEL. AS AN ALTERNATIVE WAY – Speedy Loan Online​​ : Evidence on the Effects of a Shock to Fiscal Policy

fiscal policyIn this section we accomplish two tasks. First, we describe our strategy for estimating the effects of an exogenous shock to fiscal policy. Second, we present the results of implementing this strategy.

2.1. Identifying the Effects of A Fiscal Policy Shock

Ramey and Shapiro (1998) use a ‘narrative approach’ to isolate three arguably exogenous events that led to large military buildups and total government purchases: the beginning of the Korean War (1950:3), the beginning of major U.S. involvement in the Vietnam War (1965:1) and the beginning of the Carter-Reagan defense buildup (1980:1).

To estimate the exogenous movements in government purchases, Gt, and average marginal tax rates, rt, induced by the onset of a Ramey-Shapiro episode and the corresponding movements in other variables, we use the following procedure. Define the set of dummy variables Dt, where Dt = 1 if t = {1950:3, 1965:1, 1980:1} and zero otherwise. We include Dt as an explanatory variable in a vector autoregression (VAR). Suppose that the k x 1 vector stochastic process Zt has the representation:

Formule 1

and E is a positive definite k x k matrix. The Ai can be consistently estimated using least squares. The response of Zit+k, the ith element of Zt+k, to the onset of a Ramey-Shapiro episode at date t, is given by the coefficient on Lk in the expansion of [I — Ai{L)L]~l A2(L). Note that this procedure assumes that the Ramey-Shapiro episodes are of equal intensity.

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