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Pre-announcement and Timing - The Effects of a Government Expenditure Shock

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  • Alexander Kriwoluzky

Abstract

This paper investigates the effect of a government expenditure shock on consumption and real wages. I identify the shock by exploiting its pre-announced nature, i.e. different signs of the responses in investment, hours worked and output during the announcement and after the realization of the shock. Since pre-announcement leads to a non-stationary moving average representation, I estimate and identify a VMA model. The identifying restrictions are derived from a DSGE model, which is estimated by matching the impulse response functions of the VMA model. Private consumption is found to respond negatively during the announcement period and positively after the realization. The reaction of real wages is significantly positive on impact, decreases during the announcement horizon, and is again significantly positive for two quarters after the realization.

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Paper provided by European University Institute in its series Economics Working Papers with number ECO2009/40.

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Date of creation: 2009
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Handle: RePEc:eui:euiwps:eco2009/40

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Keywords: Fiscal Policy shock; Bayesian Estimation; DSGE model; Vector Autoregression;

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Cited by:
  1. Eric Leeper & Todd Walker, 2011. "Information Flows and News Driven Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 55-71, January.
  2. Sorge, Marco M., 2012. "News shocks or parametric indeterminacy? An observational equivalence result in linear rational expectations models," Economics Letters, Elsevier, vol. 114(2), pages 198-200.
  3. Furlanetto, Francesco, 2011. "Fiscal stimulus and the role of wage rigidity," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(4), pages 512-527, April.

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