The Transmission Channels of Government Spending Uncertainty

Anna Belianska (), Aurélien Eyquem and Céline Poilly ()
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Anna Belianska: Aix Marseille Univ, CNRS, AMSE, Marseille, France.

No 2115, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: Higher uncertainty about government spending generates a persistent decline in the economic activity in the Euro Area. This paper emphasizes the transmission channels explaining this empirical fact. First, a Stochastic Volatility model is estimated on European government consumption to build a measure of government spending uncertainty. Plugging this measure into a SVAR model, we stress that government spending uncertainty shocks have recessionary, persistent and humped-shaped effects. Second, we develop a New Keynesian model with financial frictions applying to a portfolio of equity and long-term government bonds. We argue that a portfolio effect-resulting from the imperfect substitutability among both assets-acts as a critical amplifier of the usual transmission channels.

Keywords: government spending uncertainty; stochastic volatility; portfolio adjustment cost (search for similar items in EconPapers)
JEL-codes: E52 E62 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2021-03
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The Transmission Channels of Government Spending Uncertainty (2021)
Working Paper: The Transmission Channels of Government Spending Uncertainty (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:2115

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