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Identifying the Effects of Government Spending Shocks with and without Expected Reversal: an Approach Based on U.S. Real-Time Data

Jacopo Cimadomo (), Sebastian Hauptmeier and Sergio Sola
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Sergio Sola: IHEID, The Graduate Institute of International and Development Studies, Geneva

No 12-2011, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: This paper investigates how expectations about future government spending affect the transmission of fiscal policy shocks. We study the effects of two different types of government spending shocks in the United States: (i) spending shocks that are accompanied by an expected reversal of public spending growth below trend; (ii) spending shocks that are accompanied by expectations of future spending growth above trend. We use the Ramey (2011)’s time series of military build-ups to measure exogenous spending shocks, and deviations of forecasts of public spending with respect to past trends, evaluated in real-time, to distinguish shocks into these two categories. Based on a structural VAR analysis, our results suggest that shocks associated with an expected spending reversal exert expansionary effects on the economy and accelerate the correction of the initial increase in public debt. Shocks associated with expected spending growth above trend, instead, are characterized by a contraction in aggregate demand and a more persistent increase in public debt. The main channel of transmission seems to run through agents’ perception of the future macroeconomic environment.

Keywords: Government spending shocks; Survey of Professional Forecasters; Real-time data; Spending reversal; Fiscal multipliers. (search for similar items in EconPapers)
JEL-codes: E62 E65 H20 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2011-07
New Economics Papers: this item is included in nep-cba, nep-fdg and nep-mac
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