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

Klaus Gründler () and Sarah Sauerhammer

Applied Economics Letters, 2018, vol. 25, issue 15, 1045-1050

Abstract: This article contributes to the debate on how to properly identify exogenous fiscal shocks in the data. We include expectations held by consumers and firms into the standard vector autoregression (VAR) framework based on information from historical issues of the German political magazine Der Spiegel. The findings underscore the need to account for expectations, as failing to do so leads to significant misinterpretation of the effects of government spending. When neglecting anticipation effects, our results support the recent findings for Germany by pointing to a rather positive effect of government spending on GDP. However, inclusion of expectations yields a change in this effect, suggesting that government spending is much less beneficial for GDP, as it crowds out private consumption and investment.

Date: 2018
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DOI: 10.1080/13504851.2017.1394967

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