Understanding Why Fiscal Stimulus Can Fail through the Lens of the Survey of Professional Forecasters
Hyeongwoo Kim () and
Shuwei Zhang ()
No auwp2018-04, Auburn Economics Working Paper Series from Department of Economics, Auburn University
This paper shows that fiscal policy in the U.S. has become ineffective due to lack of coordination between monetary and fiscal policy. We present a New Keynesian model that generates strong output effects of government spending shocks only when monetary policy coordinates well with fiscal policy. Employing the post-war U.S. data, we report strong stimulus effects of fiscal policy during the pre-Volcker era, which rapidly dissipate when we shift the sample period to the post-Volcker era. Finding a negligible role of the real interest rate in the propagation of government spending shocks, we propose an alternative explanation using a consumer sentiment channel. Employing the Survey of Professional Forecasters data, we show that forecasters tend to systematically over-estimate real GDP growth in response to positive innovations in government spending when policies coordinate well with each other. On the other hand, they are likely to formulate pessimistic forecasts when the monetary authority maintains a hawkish stance that conflicts with the fiscal stimulus. The fiscal stimulus, under such circumstances, may generate consumer pessimism, which decreases private spending and ultimately weakens the output effects of fiscal policy. We also provide statistical evidence that confirms an important role of the sentiment channel under different regimes of policy coordination.
Keywords: Fiscal Policy; Time-varying Effectiveness; Policy Coordination; Consumer Sentiment; Survey of Professional Forecasters (search for similar items in EconPapers)
JEL-codes: E32 E61 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
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