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Policy Coordination and the Effectiveness of Fiscal Stimulus

Hyeongwoo Kim () and Shuwei Zhang

No auwp2022-01, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: This paper shows that government spending shocks in the U.S. has become ineffective due to lack of coordination between monetary and fiscal policies. Employing the post-war U.S. data, we report strong stimulus effects of fiscal policy during the pre-Volcker era, which rapidly dissipate as the sample period is shifted toward the post-Volcker era. We explain the causes of this phenomena via a sentiment channel. Employing the Survey of Professional Forecasters data, we show that forecasters tend to systematically overestimate 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 underestimate real GDP responses when the monetary authority maintains a hawkish stance that conflicts with the fiscal stimulus. The fiscal stimulus, under such circumstances, generates consumer pessimism, which reduces private spending and ultimately weakens the output effects of fiscal policy. We further report statistical test results that confirm our claims.

Keywords: Fiscal Policy; Time-varying Effectiveness; Policy Coordination; Sentiment; Survey of Professional Forecasters (search for similar items in EconPapers)
JEL-codes: E32 E61 E62 (search for similar items in EconPapers)
Date: 2022-05
New Economics Papers: this item is included in nep-mac
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