Government Spending Policy Uncertainty and Economic Activity: U.S. Time Series Evidence

48 Pages Posted: 18 Jan 2017 Last revised: 13 Mar 2017

See all articles by Wongi Kim

Wongi Kim

Korea Institute for International Economic Policy

Date Written: December 16, 2016

Abstract

In this paper, I empirically examine the effects of uncertainty about government spending policy on economic activity using U.S. time series data. To this end, I constructed government spending policy uncertainty indexes and estimate proxy SVAR model. Proxy SVAR model with constructed indexes shows that an increase in government spending policy uncertainty has negative, sizable, and prolonged effects on economic activity. Moreover, the results imply that the commonly adopted recursive SVAR model in literature on policy uncertainty systematically underestimates the adverse effect of government spending policy uncertainty because of the endogeneity issue. One policy suggestion based on the empirical finding is clear announcement of future government spending path.

Keywords: Policy Uncertainty, Government Spending Policy Uncertainty Index, Government Spending Policy Uncertainty Shock, Proxy SVAR

JEL Classification: C32, E32, E62

Suggested Citation

Kim, Wongi, Government Spending Policy Uncertainty and Economic Activity: U.S. Time Series Evidence (December 16, 2016). KIEP Research Paper, Working Papers 16-10, Available at SSRN: https://ssrn.com/abstract=2901382 or http://dx.doi.org/10.2139/ssrn.2901382

Wongi Kim (Contact Author)

Korea Institute for International Economic Policy ( email )

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