Event Details

This Seminar is hosted by the Economics Department

Soren Hove Ravn will present a seminar “The Inflation Response to Government Spending Shocks: A Fiscal Price Puzzle?” (with Peter L. Jorgensen)

Abstract : This paper provides empirical evidence that prices decline significantly and persistently in response to a positive government spending shock. This result stands out across a wide variety of specifications of our Structural Vector Autoregression (SVAR) model and for different price indices. The decline in prices is accompanied by an increase in output and private consumption, as found in most of the existing literature, as well as an increase in Total Factor Productivity. These findings are hard to reconcile with standard New Keynesian models with exogenous productivity, which typically generate higher prices anda drop in consumption following a fiscal expansion. We show that the introduction of variable technology utilization can enable an otherwise standard New Keynesian model to match our empirical findings. Variable technology utilization allows forms to accommodate an increase in demand by adopting new technology into the production process. The resulting increase in measured productivity leads to a decline inprices and an increase in consumption.