Fiscal Policy Uncertainty and the Business Cycle: Time Series Evidence from Italy

32 Pages Posted: 8 Dec 2017

Date Written: December 5, 2017

Abstract

Economic uncertainty is an important factor behind macroeconomic fluctuations: in an uncertain environment, firms reduce hiring and investment, financial intermediaries are more reluctant to lend and households increase their propensity to save. In the present paper, we study the effects of the uncertainty which arises from fiscal policy decisions. We propose a new measure of fiscal policy uncertainty (FPU). In particular, we estimate a fiscal reaction function, allowing the volatility of the shocks to be time-varying. The time series of this volatility is our proxy for FPU. Looking at Italian data over the period 1981-2014, we find that an unexpected increase in our FPU measure has a negative impact on the economy. One implication of this result is that the same change in the government budget can have different effects depending on whether it is associated with a reduction or an increase in FPU. Therefore, the neglect of FPU may partly explain why the size (and sign) of fiscal multipliers differs so much across existing empirical studies.

Keywords: fiscal policy, uncertainty

JEL Classification: C2, E3, 081

Suggested Citation

Anzuini, Alessio and Rossi, Luca and Tommasino, Pietro, Fiscal Policy Uncertainty and the Business Cycle: Time Series Evidence from Italy (December 5, 2017). Bank of Italy Temi di Discussione (Working Paper) No. 1151. Available at SSRN: https://ssrn.com/abstract=3084020 or http://dx.doi.org/10.2139/ssrn.3084020

Alessio Anzuini

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Luca Rossi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Pietro Tommasino (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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