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Business Uncertainty and the Effectiveness of Fiscal Policy in Germany

Tim Berg ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper explores how business uncertainty affects the effectiveness of fiscal policy in Germany in the years 1970 to 2014. I use measures of business uncertainty that are derived from the firm-level data of the Ifo Business Climate Survey and interact them with the parameters of a structural vector autoregression to produce state-dependent spending multipliers. I observe that fiscal policy is most effective when uncertainty is high and that the difference in multipliers across uncertainty levels is largest for longer-term horizons. The results also point to a prominent role for business confidence in the state-dependent transmission of spending shocks to output. The findings have an important implication for stabilization policies. Since monetary policy is less effective during volatile episodes, fiscal policy is the better tool to stimulate the economy in uncertain times.

Keywords: Business Uncertainty; Government Spending Multiplier; Interacted Vector Autoregression; Germany (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2016-02-01
New Economics Papers: this item is included in nep-mac
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