The Expected Inflation Channel of Government Spending in the Postwar U.S.

By Bill Dupor, Rong Li. 2013

170 citations recorded by the source corpus.

There exist sticky price models in which the output response to a government spending change can be large if the central bank is nonresponsive to inflation. According to this “expected inflation channel,” government spending drives up expected inflation, which in turn, reduces the real interest rate and leads to an increase in private consumption. This paper examines whether the channel was important in the post-WWII U.S., with particular attention to the 2009 Recovery Act period. First, we show that a model calibrated to have a large output multiplier requires a large response of expected inflation to a government spending shock. Next, we show that this large response is inconsistent with structural vector autoregression evidence from the Federal Reserve׳s passive policy period (1959–1979). Then, we study expected inflation measures during the Recovery Act period in conjunction with a panel of professional forecaster surveys, a cross-country comparison of bond yields and fiscal policy news announcements. We show that the expected inflation response was too small to engender a large output multiplier.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/ac606f958c48efffa117bf24634635c0ec118ac4

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Citations in the corpus

Fiscal Policy in an Unemployment Crisis (2016, unknown): “This is partly at odds with the data, which display only modest deviations from trend without any particular sharp movements (Dupor and Li, 2015).”
Clearing Up the Fiscal Multiplier Morass (2011, unknown): “Dupor and Li (2015) argue that passive monetary policy gives government spending expansions unreasonably large inflationary consequences that are inconsistent with empirical evidence.”
Asset Liquidity and Stock Liquidity (2012, background): “Managers may be able to sustain inefficient operations by liquidating the assets (see DeAngelo, DeAngelo, and Wruck (2002)).”
The Effect of Unconventional Fiscal Policy on Consumption Expenditure (2016, unknown): “Dupor and Li (2015) do not find evidence consistent with government purchases stimulating inflation expectations.”
Abenomics: Preliminary Analysis and Outlook (2014, unknown): “However, evidence from Wieland (2014) and Dupor and Li (2013) suggests that this mechanism is unlikely to be quantitatively important. occurred in April 1997, and it appears to have pulled forward durables purchases.44 We doubt, however, that the tax increase is a major contributor to the increase…”
Controlling shareholder, expropriations and firm's leverage decision: Evidence from Chinese Non-tradable share reform (2012, unknown): “Excess control rights and firms’ leverage policy As discussed above, previous literature implies that excess control rights are associated with more tunneling by controlling shareholders (Claessens et al., 2002; Faccio and Lang, 2002).”
Real Asset Illiquidity and the Cost of Capital (2014, background): “For example, in their study of LA Gear’s collapse, DeAngelo, DeAngelo, and Wruck (2002) argue that the firm’s ability to liquidate working capital helped management maneuver in financial distress.”
Debt Covenant Renegotiations and Creditor Control Rights (2014, unknown): “See, for example, DeFond and Jiambalvo (1992) for the association between debt covenants and accounting accruals and Beneish and Press (1993) for the impact of technical default on the use of income-increasing accounting policies.”