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Fiscal policy uncertainty and the business cycle: time series evidence from Italy

Author

Listed:
  • Alessio Anzuini

    (Bank of Italy)

  • Luca Rossi

    (Bank of Italy)

  • Pietro Tommasino

    (Bank of Italy)

Abstract

Economic uncertainty is an important factor behind macroeconomic fluctuations: in an uncertain environment, firms reduce hiring and investment, financial intermediaries are more reluctant to lend and households increase their propensity to save. In the present paper, we study the effects of the uncertainty which arises from fiscal policy decisions. We propose a new measure of fiscal policy uncertainty (FPU). In particular, we estimate a fiscal reaction function, allowing the volatility of the shocks to be time-varying. The time series of this volatility is our proxy for FPU. Looking at Italian data over the period 1981-2014, we find that an unexpected increase in our FPU measure has a negative impact on the economy. One implication of this result is that the same change in the government budget can have different effects depending on whether it is associated with a reduction or an increase in FPU. Therefore, the neglect of FPU may partly explain why the size (and sign) of fiscal multipliers differs so much across existing empirical studies.

Suggested Citation

  • Alessio Anzuini & Luca Rossi & Pietro Tommasino, 2017. "Fiscal policy uncertainty and the business cycle: time series evidence from Italy," Temi di discussione (Economic working papers) 1151, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1151_17
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    Cited by:

    1. R. Golinelli & I. Mammi & A. Musolesi, 2018. "Parameter heterogeneity, persistence and cross-sectional dependence: new insights on fiscal policy reaction functions for the Euro area," Working Papers wp1120, Dipartimento Scienze Economiche, Universita' di Bologna.
    2. Hong, Yanran & Xu, Pengfei & Wang, Lu & Pan, Zhigang, 2022. "Relationship between the news-based categorical economic policy uncertainty and US GDP: A mixed-frequency Granger-causality analysis," Finance Research Letters, Elsevier, vol. 48(C).
    3. Rongwu Zhang & Lan Luo & Jianjun Du, 2023. "The influence of fiscal policy uncertainty on corporate total factor productivity: Evidence from Chinese public companies," Contemporary Economic Policy, Western Economic Association International, vol. 41(3), pages 532-554, July.
    4. Jiang, Qisheng & Cheng, Sheng, 2021. "How the fiscal and monetary policy uncertainty of China respond to global oil price volatility: A multi-regime-on-scale approach," Resources Policy, Elsevier, vol. 72(C).
    5. Attinasi, Maria Grazia & Palazzo, Alessandra Anna & Pierluigi, Beatrice, 2019. "Fiscal activism in the euro area and in other advanced economies: new evidence," Working Paper Series 2344, European Central Bank.
    6. Raymond L. Aor & Afees A. Salisu & Isah J. Okpe, 2021. "A Comparative Assessment of the Global Effects of US Monetary and Fiscal Policy Uncertainty Shocks," Advances in Decision Sciences, Asia University, Taiwan, vol. 25(4), pages 89-114, December.
    7. Joscha Beckmann & Robert L Czudaj & Georgios Kouretas, 2021. "Fiscal policy uncertainty and its effects on the real economy: German evidence," Oxford Economic Papers, Oxford University Press, vol. 73(4), pages 1516-1535.
    8. Alessio Anzuini & Luca Rossi, 2021. "Fiscal policy in the US: a new measure of uncertainty and its effects on the American economy," Empirical Economics, Springer, vol. 61(5), pages 2613-2634, November.
    9. Yi Zhang & Mengyang Wang & Tao Shi & Huan Huang & Qi Huang, 2023. "Health Damage of Air Pollution, Governance Uncertainty and Economic Growth," IJERPH, MDPI, vol. 20(4), pages 1-21, February.
    10. Alessio Anzuini & Luca Rossi, 2018. "Fiscal policy in the US: a new measure of uncertainty and its recent development," Temi di discussione (Economic working papers) 1197, Bank of Italy, Economic Research and International Relations Area.
    11. Mindaugas Butkus & Diana Cibulskiene & Lina Garsviene & Janina Seputiene, 2022. "Role of Uncertainty in Debt-Growth Nexus," Prague Economic Papers, Prague University of Economics and Business, vol. 2022(1), pages 58-78.
    12. Rajendra N. Paramanik & Avishek Bhandari & Bandi Kamaiah, 2022. "Financial cycle, business cycle, and policy uncertainty in India: An empirical investigation," Bulletin of Economic Research, Wiley Blackwell, vol. 74(3), pages 825-837, July.
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    14. Luca Rossi, 2020. "Indicators of uncertainty: a brief user’s guide," Questioni di Economia e Finanza (Occasional Papers) 564, Bank of Italy, Economic Research and International Relations Area.
    15. Mindaugas Butkus & Diana Cibulskiene & Lina Garsviene & Janina Seputiene, 2021. "The Heterogeneous Public Debt–Growth Relationship: The Role of the Expenditure Multiplier," Sustainability, MDPI, vol. 13(9), pages 1-22, April.

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    More about this item

    Keywords

    fiscal policy; uncertainty;

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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