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Do expectations matter? Reassessing the effect of government spending on key macroeconomic variables in Germany

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  • Gründler, Klaus
  • Sauerhammer, Sarah

Abstract

This paper investigates the effects of government spending on key macroeconomic variables in Germany. It contributes to the ongoing debate on how to properly identify exogenous fiscal shocks in the data and on whether or not the government should intervene in the business cycle. Following Ramey (2011b), we include expectations held by consumers and firms into the standard VAR framework based on information from historical issues of the German political magazine Der Spiegel. The results suggest that government spending lowers gross domestic product, as it crowds out private consumption and investment. The findings also underscore the need to account for expectations, as failing to do so leads to significant misinterpretation of the effects of government spending. In fact, when neglecting anticipation effects, our results support the recent findings for Germany by pointing to a rather positive effect of government spending on GDP.

Suggested Citation

  • Gründler, Klaus & Sauerhammer, Sarah, 2016. "Do expectations matter? Reassessing the effect of government spending on key macroeconomic variables in Germany," Discussion Paper Series 134, Julius Maximilian University of Würzburg, Chair of Economic Order and Social Policy.
  • Handle: RePEc:zbw:wuewwb:134
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    Cited by:

    1. Klaus Gründler & Niklas Potrafke, 2019. "Ideologically-charged terminology: austerity, fiscal consolidation, and sustainable governance," CESifo Working Paper Series 7613, CESifo.
    2. Hazwan Haini & Pang Wei Loon, 2021. "Does Government Ideology Affect the Relationship Between Government Spending and Economic Growth?," Economic Papers, The Economic Society of Australia, vol. 40(3), pages 209-216, September.

    More about this item

    Keywords

    Fiscal Policy; Government Spending; Vector Autoregression Model; Expectations;
    All these keywords.

    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
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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