The Transmission Channels of Government Spending Uncertainty

Anna Belianska (), Aurélien Eyquem and Céline Poilly ()
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Anna Belianska: AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique

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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)
Date: 2021-02
New Economics Papers: this item is included in nep-dge, nep-eec and nep-fdg
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03160370v1
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Working Paper: The Transmission Channels of Government Spending Uncertainty (2021)
Working Paper: The Transmission Channels of Government Spending Uncertainty (2021)
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