Working Paper: CEPR ID: DP10115
Authors: Mario Forni; Luca Gambetti
Abstract: We identify government spending news and surprise shocks using a novel identification based on the Survey of Professional Forecasters. News shocks lead to an increase of the interest rate, a real appreciation of US dollar and a worsening of the trade balance. The opposite is found for the standard surprise shock which raises government spending on impact: the currency depreciates and net exports improve. We reconcile the two conflicting results showing the different timing of the spending reversals associated with the two shocks. The effects of the news shock on government spending are much more persistent and the reversal occurs much later.
Keywords: crowding-out; fiscal foresight; fiscal policy; forecast revisions; government spending; government spending news; structural VARs; survey of professional forecasters
JEL Codes: C32; E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government spending news shocks (E62) | increase in interest rate (E43) |
| government spending news shocks (E62) | real appreciation of the US dollar (F31) |
| government spending news shocks (E62) | worsening of the trade balance (F14) |
| standard surprise shocks (D80) | increase in government spending (H59) |
| standard surprise shocks (D80) | depreciation of currency (F31) |
| standard surprise shocks (D80) | improvement of net exports (F14) |
| government spending multiplier is above one in the short run (E62) | significant increase in long-term interest rates (E43) |
| government spending multiplier is above one in the short run (E62) | significant appreciation of the dollar (F31) |
| government spending multiplier is above one in the short run (E62) | worsening of the current account balance (F32) |
| timing of spending reversals associated with news shocks differs significantly from surprise shocks (G14) | differences in impulse response functions (C22) |