Uncertainty and the effectiveness of fiscal policy in the United States and Brasil: SVAR Approach

Eduardo de Sa Fortes Leitao Rodrigues ()
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Eduardo de Sa Fortes Leitao Rodrigues: Universidade de Lisboa

No 2023.03, Working Papers from International Network for Economic Research - INFER

Abstract: The paper analyses the interference of uncertainty on the effectiveness of fiscal policy. This issue is investigated through the lens of a Structural Vector Auto Regressive (SVAR) model for the United States and Brazil. Imposing government spending shocks, the models highlight a positive effect on economic activity. The results suggest Keynesian effects on consumption and GDP. To assess the effects of uncertainty, the models use two indices: the Economic Policy Uncertainty Index (EPU) and the World Uncertainty Index (WUI). The findings indicate that the fiscal effects are considerably less intense when uncertainty reaches high levels, consistent with the Real Options approach. The results suggest that agents are more cautious when the high uncertainty overshadows the outline of the economic scenario. In this sense, uncertainty disturbs agents’ decisions and decreases consumption, investment, and economic activity.

Keywords: Fiscal Policy; Uncertainty; SVAR; The United States; Brazil. (search for similar items in EconPapers)
JEL-codes: F (search for similar items in EconPapers)
Pages: 49 pages
Date: 2023
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