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FORESIGHT AND THE MACROECONOMIC IMPACT OF FISCAL POLICY: EVIDENCE FOR FRANCE, GERMANY AND ITALY

Lilia Cavallari () and Simone Romano ()

No 216, Working Papers from CREI Università degli Studi Roma Tre

Abstract: This paper provides evidence in support of the hypothesis that fiscal policy is largely anticipated and its effects depend on expectations. Based on a 2-country Bayesian VAR model between major European economies, we find that an unanticipated fiscal stimulus leads to expectations of strong deficit reversals. This in turn depresses domestic and foreign activity. Foresight shocks, on the contrary, have positive effects on domestic activity. Differences in the responses to surprise and foresight shocks reflect the role of expectations. The evidence in our study is consistent with a regime where deficit reversals are mainly based on taxation alone.

Keywords: fiscal policy; VAR model; fiscal spillovers; fiscal multiplier. (search for similar items in EconPapers)
JEL-codes: E62 F45 H62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-pbe
Date: 2016, Revised 2016
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Persistent link: https://EconPapers.repec.org/RePEc:rcr:wpaper:02_16

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