How Does the US Government Finance Fiscal Shocks?

How Does the US Government Finance Fiscal Shocks?

By
Berndt Antje, Hanno Lustig, Sevin Yeltekin
American Economic Journal: Macroecomics. January
2012, Vol. 4, Issue 1, Pages 69-104

We develop a method for identifying and quantifying the fiscal channels that help finance government spending shocks. We define fiscal shocks as surprises in defense spending and show that they are more precisely identified when defense stock data are used in addition to aggregate macroeconomic data. Our results show that in the postwar period, about 9 percent of the US government’s unanticipated spending needs were financed by a reduction in the market value of debt and more than 70 percent by an increase in primary surpluses. Additionally, we find that long-term debt is more effective at absorbing fiscal risk than short-term debt.