Do expectations matter? Reassessing the effect of government spending on key macroeconomic variables in Germany

Klaus Gründler () and Sarah Sauerhammer

No 134, Discussion Paper Series from Julius Maximilian University of Würzburg, Chair of Economic Order and Social Policy

Abstract: This paper investigates the effects of government spending on key macroeconomic variables in Germany. It contributes to the ongoing debate on how to properly identify exogenous fiscal shocks in the data and on whether or not the government should intervene in the business cycle. Following Ramey (2011b), we include expectations held by consumers and firms into the standard VAR framework based on information from historical issues of the German political magazine Der Spiegel. The results suggest that government spending lowers gross domestic product, as it crowds out private consumption and investment. The findings also underscore the need to account for expectations, as failing to do so leads to significant misinterpretation of the effects of government spending. In fact, when neglecting anticipation effects, our results support the recent findings for Germany by pointing to a rather positive effect of government spending on GDP.

Keywords: Fiscal Policy; Government Spending; Vector Autoregression Model; Expectations (search for similar items in EconPapers)
JEL-codes: C32 D84 E32 E62 H31 H32 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-sog
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Journal Article: Do expectations matter? Reassessing the effects of government spending on key macroeconomic variables in Germany (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:wuewwb:134

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