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Assessing the effects of fiscal policy news under imperfect information

Author

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  • Luisa Corrado
  • Edgar Silgado-Gómez

Abstract

We study the transmission of fiscal policy under imperfect information where government spending is composed of permanent and transitory components. Agents learn about the previous processes by only observing overall public spending and a noisy signal. Under this theoretical setting, we construct a novel measure of fiscal policy news and show that the estimated variable agrees with the historical narrative evidence for the US economy. Our measure captures sluggish information shocks rather than revisions with the benefit of being generated by a theoretical model. We then document the effects of this proxy on economic activity by using local projection methods. The results indicate that real activity indicators exhibit delayed positive effects. We also notice that public debt shrinks and tax revenues increase after 2 years due to the delayed output expansion in the aftermath of the fiscal news shock.

Suggested Citation

  • Luisa Corrado & Edgar Silgado-Gómez, 2023. "Assessing the effects of fiscal policy news under imperfect information," Oxford Economic Papers, Oxford University Press, vol. 75(2), pages 574-587.
    • Handle: RePEc:oup:oxecpp:v:75:y:2023:i:2:p:574-587.
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    File URL: http://hdl.handle.net/10.1093/oep/gpac028
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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
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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