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

42 Pages Posted: 13 Jul 2011

See all articles by Jacopo Cimadomo

Jacopo Cimadomo

European Central Bank

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics

Sergio Sola

Graduate Institute of International and Development Studies (IHEID)

Date Written: July 5, 2011

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

JEL Classification: E62, E65, H20

Suggested Citation

Cimadomo, Jacopo and Hauptmeier, Sebastian and Sola, Sergio, Identifying the Effects of Government Spending Shocks with and without Expected Reversal: An Approach Based on U.S. Real-Time Data (July 5, 2011). ECB Working Paper No. 1361, Available at SSRN: https://ssrn.com/abstract=1878979

Jacopo Cimadomo (Contact Author)

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Sergio Sola

Graduate Institute of International and Development Studies (IHEID) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

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