Figure 1 displays the response of government spending to a shock to eg
t equal to 1 percentage
point of GDP, from the benchmark VAR with 5 variables and a linear time
trend described in section 2. Government spending and net taxes are ordered first and
second, respectively, and the elasticity of real government spending to prices is equal to
-.5. The figure also displays the two symmetric one standard error bands, computed by
simulations based on 500 replications, as in e.g. Stock and Watson [2001].