Government Spending Shocks in Open Economy VARs

33 Pages Posted: 23 Oct 2014

See all articles by Mario Forni

Mario Forni

Università di Modena; Centre for Economic Policy Research (CEPR)

Luca Gambetti

Universitat Autonoma de Barcelona

Date Written: August 2014

Abstract

We identify government spending news and surprise shocks using a novel identification based on the Survey of Professional Forecasters. News shocks lead to an increase of the interest rate, a real appreciation of US dollar and a worsening of the trade balance. The opposite is found for the standard surprise shock which raises government spending on impact: the currency depreciates and net exports improve. We reconcile the two conflicting results showing the different timing of the spending reversals associated with the two shocks. The effects of the news shock on government spending are much more persistent and the reversal occurs much later.

Keywords: crowding-out, fiscal foresight, fiscal policy, forecast revisions, government spending, government spending news, structual VARs, survey of professional forecasters

JEL Classification: C32, E32, E62

Suggested Citation

Forni, Mario and Gambetti, Luca, Government Spending Shocks in Open Economy VARs (August 2014). CEPR Discussion Paper No. DP10115. Available at SSRN: https://ssrn.com/abstract=2513469

Mario Forni (Contact Author)

Università di Modena; Centre for Economic Policy Research (CEPR) ( email )

Luca Gambetti

Universitat Autonoma de Barcelona ( email )

Plaça Cívica
Cerdañola del Valles
Barcelona, Barcelona 08193
Spain

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