Fiscal Policy News Shocks and the Japanese Macroeconomy

Tuan Khai Vu

No 34, Discussion Papers from Meisei University, School of Economics

Abstract: Recently it has been increasingly recognized that, when identifying fiscal policy shocks, we should take into account the fact that they are often well anticipated before they actually materialize. Extending the structural VAR of Mountford and Uhlig (2009), this paper uses a new method that is able to identify fiscal policy shocks as both unanticipated and anticipated (or news) shocks. The method is also able to identify multiple news shocks. The method is applied to the data of Japan. We find that there is a clear difference between the effects of an unanticipated government spending shock and those of an anticipated one: in the whole sample period (1968Q1-2010Q1), the former significantly increases GDP, consumption, and employment, while the latter does not. We also find that the effectiveness of government spending policy is very different between the pre- and post-bubble periods: an anticipated government spending policy can stimulate the economy in terms of GDP and consumption in the former period, while in the latter period it cannot do so or it even aggravates the business cycle fluctuations at some horizons.

Keywords: government spending; Japanese economy; news shock; VAR; sign restriction (search for similar items in EconPapers)
JEL-codes: C32 E32 E62 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2015-09
New Economics Papers: this item is included in nep-mac
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