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The Transmission Channels of Government Spending Uncertainty

Céline Poilly (), Beliansk Anna and Aurélien Eyquem

No 15894, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Higher uncertainty about government spending generates a persistent decline in the economic activity in the Euro Area. This paper emphasizes the transmission channels explaining this empirical fact. First, a Stochastic Volatility model is estimated on European government consumption to build a measure of government spending uncertainty. Plugging this measure into a SVAR model, we stress that government spending uncertainty shocks have recessionary, persistent and humped-shaped effects. Second, we develop a New Keynesian model with financial frictions applying to a portfolio of equity and long-term government bonds. We argue that a portfolio effect -- resulting from the imperfect substitutability among both assets -- acts as a critical amplifier of the usual transmission channels.

Keywords: Government spending uncertainty; stochastic volatility; Portfolio adjustment cost (search for similar items in EconPapers)
JEL-codes: E52 E62 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mac and nep-ore
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