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Fiscal Foresight, Limited Information and the Effects of Government Spending Shocks

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  • Matteo Fragetta
  • Emanuel Gasteiger

Abstract

type="main" xml:id="obes12036-abs-0001"> We quantify the impact of government spending shocks in the US. Thereby, we control for fiscal foresight, a specific limited information problem (LIP) by utilizing the narrative approach. Moreover, we surmount the generic LIP inherent in vector autoregressions (VARs) by a factor-augmented VAR (FAVAR) approach. We find that a positive deficit-financed defence shock raises output by more than in a VAR (e.g. 2.61 vs. 2.04 for peak multipliers). Furthermore, our evidence suggests that consumption is crowded in. These results are robust to variants of controlling for fiscal foresight and reveal the crucial role of the LIP in fiscal VARs.

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  • Matteo Fragetta & Emanuel Gasteiger, 2014. "Fiscal Foresight, Limited Information and the Effects of Government Spending Shocks," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 76(5), pages 667-692, October.
    • Handle: RePEc:bla:obuest:v:76:y:2014:i:5:p:667-692
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    1. C. Glocker & G. Sestieri & P. Towbin, 2017. "Time-varying fiscal spending multipliers in the UK," Working papers 643, Banque de France.
    2. Quaghebeur, Ewoud, 2019. "Learning And The Size Of The Government Spending Multiplier," Macroeconomic Dynamics, Cambridge University Press, vol. 23(8), pages 3189-3224, December.
    3. Laumer, Sebastian, 2020. "Government spending and heterogeneous consumption dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 114(C).
    4. Batini, Nicoletta & Di Serio, Mario & Fragetta, Matteo & Melina, Giovanni & Waldron, Anthony, 2022. "Building back better: How big are green spending multipliers?," Ecological Economics, Elsevier, vol. 193(C).
    5. Di Serio, Mario & Fragetta, Matteo & Melina, Giovanni, 2021. "The impact of r-g on Euro-Area government spending multipliers," Journal of International Money and Finance, Elsevier, vol. 119(C).
    6. Ilori, Ayobami E. & Paez-Farrell, Juan & Thoenissen, Christoph, 2022. "Fiscal policy shocks and international spillovers," European Economic Review, Elsevier, vol. 141(C).
    7. Glocker, Christian & Sestieri, Giulia & Towbin, Pascal, 2019. "Time-varying government spending multipliers in the UK," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 180-197.
    8. Mario Di Serio & Matteo Fragetta & Emanuel Gasteiger, 2020. "The Government Spending Multiplier at the Zero Lower Bound: Evidence from the United States," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(6), pages 1262-1294, December.
    9. Pallara, Kevin, 2016. "The dynamic effects of government spending: a FAVAR approach," MPRA Paper 92283, University Library of Munich, Germany.
    10. Amendola, Adalgiso & Di Serio, Mario & Fragetta, Matteo & Melina, Giovanni, 2020. "The euro-area government spending multiplier at the effective lower bound," European Economic Review, Elsevier, vol. 127(C).
    11. AMENDOLA, Adalgiso & DI SERIO, Mario & FRAGETTA, Matteo, 2018. "The Government Spending Multiplier at the Zero Lower Bound: Evidence from the Euro Area," CELPE Discussion Papers 153, CELPE - CEnter for Labor and Political Economics, University of Salerno, Italy.
    12. Mario Di Serio & Matteo Fragetta & Emanuel Gasteiger & Giovanni Melina, 2022. "The Euro Area Government Spending Multiplier in Demand- and Supply-Driven Recessions," CESifo Working Paper Series 9678, CESifo.
    13. Laumer, Sebastian & Violaris, Andreas-Entony, 2024. "Unconventional monetary policy and policy foresight," Journal of Economic Dynamics and Control, Elsevier, vol. 164(C).
    14. Takumah, Wisdom, 2021. "Effects of government spending on consumption Dynamics," MPRA Paper 109171, University Library of Munich, Germany, revised 09 Jul 2021.

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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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