2.  This papers studies the effect of government spending on a range of variables of interest (output, consumption...) under different scenarios (with financial crisis, fixed exchange rate, high debt). Step 1 (OLS) estimate the fiscal policy shock Step 2 (fixed effects panel) use previous estimates to trace dynamic effects of gov. spending on other relevant variables:  Two- step approach:

3. Findings  They argue that there is not such a thing as “the” multiplier: The multiplier to a fiscal shock vary with the economic environment. Methodology  Use of a two-step quasi-VAR methodology to add to previous literature (Perotti 1999, Blanchard Perotti 2002)  Under peg: Output responds more positively than with flexible exchange rate.  The real exchange rate appreciates while it depreciated with flexible rate.  Also, short run interest rate raises and remains positive for some time  High debt: Lower response of output and demand.  Initial no response of consumption but it increases later on (puzzling)  Stronger response of inflation and interest rate  Financial crisis: Stronger response of output and consumption while trade balance deteriorates.  Also, higher inflation, exchange rate depreciation and temporary rise in interest rate.

4.  Clean set up: estimate shock first and see what it is the impact on variables of interest with dummies  VAR (step1) identification relies on the assumption that government spending cannot respond to simultaneous output shock.  VAR is univariate: what is the point of using a VAR framework? The model reduces to a AR with covariates.  Could there be an omitted variable bias?

5.  In general, results are in line with economic theory, however singling out cases:  High debt: Not clear why in this case, there is no immediate response of consumption. Maybe we can think of an agent that smooth consumptions and, since debt is high, expects that fiscal stimulus will need to be compensated with a tightening later on.  Financial crisis: Straightforward to see why there is a stronger response of output,  However not so clear to see why trade balance deteriorates: exchange rate depreciate and not necessarily increased government consumption has to come from imports.  Not possible to identify coefficients in case there are combined scenarios (i.e. High debt and financial crisis).  In this case there might be trade-offs between short run and long run. Government responding to a crisis with a stimulus today may have a positive effect on short term output but it may enter in a set up where it cannot respond to crisis in the future.