Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/153795 
Year of Publication: 
2011
Series/Report no.: 
ECB Working Paper No. 1361
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
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.
Subjects: 
Fiscal multipliers
Government spending shocks
real-time data
Spending reversal
Survey of Professional Forecasters
JEL: 
E62
E65
H20
Document Type: 
Working Paper

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