Working Paper: CEPR ID: DP10553
Authors: Joan Paredes; Javier J. Pérez; Gabriel Pérez-Quiros
Abstract: Should rational agents take into consideration government policy announcements? A skilled agent (an econometrician) could set up a model to combine the following two pieces of information in order to anticipate the future course of fiscal policy in real-time: (i) the ex-ante path of policy as published/announced by the government; (ii) incoming, observed data on the actual degree of implementation of ongoing plans. We formulate and estimate empirical models for a number of EU countries (Germany, France, Italy, and Spain) to show that government (consumption) targets convey useful information about ex-post policy developments when policy changes significantly (even if past credibility is low) and when there is limited information about the implementation of plans (e.g. at the beginning of a fiscal year). In addition, our models are instrumental to unveil the current course of policy in real-time. Our approach complements a well-established branch of the literature that finds politically-motivated biases in policy targets.
Keywords: Fiscal Policy; Forecasting; Policy Credibility
JEL Codes: C54; E61; E62; H30; H68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government consumption targets (E20) | actual fiscal policy outcomes (E62) |
| political biases (D72) | effectiveness of government consumption targets in predicting policy outcomes (E61) |
| credibility of government plans (H12) | effectiveness of government consumption targets in predicting policy outcomes (E61) |
| historical credibility of government plans (E65) | insights into future course of fiscal policy (E62) |