1. Identification approaches Narrative approach – Look for exogenous movements in spending – Many of issues of timing, endogeneity with monetary policy and tax dates do not arise – Build-up dummies can be included directly as shocks in single equation or systems

2. Identification approaches VAR approach – “Structural approach” Wold causal chain Caution: Testing of identifying restrictions a no-no Need to maintain causal ordering – Identifying restriction Government spending does not respond contemporaneously to other variables Mechanically: Ordered “first” in VAR

3. Identification approaches Exogenous variation, final form regression – Aggregate, esp. miliary spending Hall, Barro, etc – State/regional/small country Flurry of recent work Estimating equation

4. Review of VAR Recursive ordering Instrumental variables interpretation

5. VAR example Estimate equation by equation Orthogonalize by putting residual from first equation into second equation (“Cholesky decomposition”) Economics/Identification: Government spending does not respond contemporaneously to output

6. VAR with exogenous variable example

7. Identification approaches Narrative approach – Look for exogenous movements in spending – Many of issues of timing, endogeneity with monetary policy and tax dates do not arise – Build-up dummies can be included directly as shocks in single equation or systems

8. Identification approaches VAR approach – “Structural approach” Wold causal chain Caution: Testing of identifying restrictions a no-no Need to maintain causal ordering – Identifying restriction Government spending does not respond contemporaneously to other variables Mechanically: Ordered “first” in VAR

9. Identification approaches Exogenous variation, final form regression – Aggregate, esp. miliary spending Hall, Barro, etc – State/regional/small country Flurry of recent work Estimating equation

10. Source: Hall (2009)

11. Source: Ramey 2011 Response to spending shocks: VAR versus Ramey- Shapiro

12. Source: Ramey 2011

13. Source: Ramey 2011