In this paper, we present the results of an empirical and theoretical investigation into the effects of government spending shocks on consumption, output, the trade balance, and the real exchange rate. Our empirical analysis uses data from a panel of four industrialized countries, the United States, the United Kingdom, Canada, and Australia, over the post-Bretton Woods period. We employ a structural vector autoregressive representation of the data. Following Fatás and Mihov (2001) and Blanchard and Perotti (2002), we identify government spending shocks by assuming that no variable other than government spending shocks themselves can affect government spending contemporaneously.
We find that a positive innovation in government spending causes an expansion in output, an expansion in consumption, a deterioration of the trade balance, and a depreciation of the real exchange rate (that is, a decline in domestic prices relative to exchange-rate-adjusted foreign prices). The effects of government spending shocks on domestic aggregate activity and private absorption have been extensively studied in the related empirical literature. Our finding that government spending shocks raise output and consumption is consistent with previous studies that have used identification assumptions and estimation techniques similar to those we employ in the present paper (e.g., Rotemberg and Woodford, 1992; Blanchard and Perotti, 2002; Fatás and Mihov, 2001; Perotti, 2004, 2007; and Gal?, López-Salido, and Vallés, 2007).
Recognizing that entering college students are the primary market for new credit card holders, credit card companies swoop down every fall on American college campuses looking for freshmen or “fresh meat.” In a “carnival atmosphere” of blaring music and free food, the credit card companies set up tables spread with glossy promotional brochures and loaded with free t-shirts, frisbees, and other gifts to lure students into applying for credit cards. Company representatives do not talk about the interest rates or fees associated with the cards. Presumably, that information is contained in the brochures. Instead, the credit card vendors emphasize the free items and an easy way to buy clothes and books or pay for spring break vacations. Credit card companies have been accused of using excessive marketing tactics and using student organizations as on-campus solicitors to pressure other students into signing up for credit cards.
College students are offered credit at unprecedented levels. Entering college students are bombarded with an average of eight credit card offers during their first week of college. Nearly half of all students receive credit card applications on a daily or weekly basis, and most receive applications at least a few times per month. The majority of students obtain their first credit card in college, and by graduation, over half have multiple cards.
Choice of formula for the measurement of inflation does matter. In January 1999 the formula principally used for aggregating price changes for the U.S. consumer price index (CPI) at the lower level of aggregation was changed from an arithmetic to a geometric mean. The effect of the change has been estimated by the Bureau of Labor Statistics (BLS) (2001) to have reduced the annual rate of increase by approximately 0.2 percentage points. Following estimates from the Boskin Commission‘s Report on the U.S. CPI (Boskin et. al, 1996 and 1998), this implied a cumulative additional national debt from over-indexing the budget of more than $200 billion over a twelve year period up to the mid-1990s.
