Fiscal Foresight, Limited Information and the Effects of Government Spending Shocks

Matteo Fragetta () and Emanuel Gasteiger ()

No 12-02, Working Papers Series 2 from ISCTE-IUL, Business Research Unit (BRU-IUL)

Abstract: We quantify the impact of government spending shocks in the US. Thereby, we control for fiscal foresight by utilizing the narrative approach. Moreover, we surmount the generic limited information problem inherent in vector autoregressions (VARs) by a factor-augmented VAR (FAVAR) approach. We find that a positive deficit-financed defense shock raises output by more than in a VAR (e.g. 2.61 vs. 2.04 for peak multipliers). Furthermore, our evidence suggests that consumption is crowded in. These results are robust to different variants of controlling for fiscal foresight and reveal the crucial role of the limited information problem in fiscal VARs.

Keywords: FAVAR; Fiscal Foresight; Limited Information; Fiscal Policy; Government Spending; Consumption (search for similar items in EconPapers)
JEL-codes: C32 E21 E32 E62 H30 H50 (search for similar items in EconPapers)
Date: 2012-06-15
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Persistent link: http://EconPapers.repec.org/RePEc:isc:iscwp2:bruwp1202

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