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<p>NBER WORKING PAPER SERIESAN EMPIRICAL CHARACTERIZATIONOF THE DYNAMIC EFFECTS OFCHANGES IN GOVERNMENTSPENDING AND TAXESON OUTPUTOlivier BlanchardRoberto PerottiWorking Paper 7269 BUREAU OF ECONOMIC RESEARCH1050 Massachusetts AvenueCambridge, MA 02138July 1999The views expressed herein are those of the authors and not necessarily those of the National Bureau ofEconomic Research. 1999 by Olivier Blanchard and Roberto Perotti. All rights reserved. Short sections of text, not to exceedtwo paragraphs, may be quoted without explicit permission provided that full credit, including notice, isgiven to the source.An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on OutputOlivier Blanchard and Roberto PerottiNBER Working Paper No. 7269July 1999JEL No. E62, E32ABSTRACTThis paper characterizes the dynamic effects of shocks in government spending and taxes oneconomic activity in the United States in the post-war period. It does so by using a mixed structuralVAR/event study approach. Identification is achieved by using institutional information about thetax and transfer systems and the timing of tax collections to identify the automatic response of taxesand spending to activity, and, by implication, to infer fiscal shocks.The results consistently show positive government spending shocks as having a positive effecton output, and positive tax shocks as having a negative effect. The multipliers for both spending andtax shocks are typically small. Turning to the effects of taxes and spending on the components ofGDP, one of the results has a distinctly non-standard flavor: Both increases in taxes and increases ingovernment spending have a strong negative effect on investment spending.Olivier Blanchard Roberto PerottiDepartment of Economics Department of EconomicsE52-373 Columbia UniversityMIT 420 W 118th St., 10th FloorMemorial Drive New York, NY 10027Cambridge, MA 02139 rp41@columbia.eduand F i r s t </p> <p> r e s u l t s </p> <p>A ( L , i s X t ] ' i s </p> <p> a i x t + a 2 e 1 + e b i x t + b 2 4 ( 2 ) c 1 t t + c 2 g 4 ' , a n d</p> <p>a r e a n d A </p> <p> 0 . 7 7 T , B , </p> <p>...</p>