Comparing alternative methodologies to estimate the effects of fiscal policy by Roberto Perotti Discussant: Evi Pappa, UAB and CEPR

Problems in Empirically Identifying Fiscal Shocks Interaction with Monetary Policy Shocks Fiscal Policy endogeneity. Predictability of Fiscal Shocks Nonfundamentalness. Limited number of identifying restrictions supported by theory.

Existing methods for identifying fiscal shocks Episodes school (Dummy variable): Rotemberg - Woodford (1992), Ramey- Shapiro (1999), Burnside et al.(2003), Cavallo (2003) Ζero-identifying restrictions (SVAR): Blanchard-Perotti (2002), Gali et.al.(2003), Fatas and Mihov (2001) Sign restrictions: Mountford and Uhlig (2003), Canova-Pappa (2003), Pappa(2005)

This paper: very important methodological contribution Compares Dummy with SVAR approach Identifies the source of differences in results  solves a puzzle Poses a question for the responses of real wages after a fiscal shock

What I will do today? I will add what is missing.

The sign restriction approach : ADVANTAGES No zero (conventional) short/ long run restrictions  no identification acrobatics All reduced form shocks have, in principle, information for structural shocks in every equation  no under-identification problem Theory based restrictions  fiscal shocks are allowed to affect all variables at the same time  no endogeneity problem Restrictions in contemporaneous correlation matrix, no delay restrictions are used  no predictability problem

Theory based restrictions +Deficits increase after a fiscal expansion contemporaneously

Data I used: all the same with Roberto except pc net taxes, I substitute with net government saving

Response of consumption after a G shock

Korean shock: cor(G,Y)>0, cor(G,DF)=0

The labor markets: business sector compensation and hours

KOREAN shock identification: cor(G,Y)>0, cor(G,DF)=0

The labor market: sample 1954:1 onwards

Conclusions  Everybody should by now agree that:  Private consumption increases after a shock to government spending, but Korea  Hours increase after a shock to government spending  Real wages seem to increase  But, for all sample and all identification schemes business sector compensation (BSC) moves insignificantly.  With SIGN approach, excluding Korean episode, also BSC increases significantly.  Question: Can NK model give a common explanations for Korean episode and SVAR and SIGN shocks?