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Assessing the Role of Sentiment in the Propagation of Fiscal Stimulus

Author

Listed:
  • Jia Bijie

    (Economist, NYC Department of Environmental Protection, Bureau of Environmental Planning and Analysis, Flushing, NY 11368, USA)

  • Kim Hyeongwoo

    (Patrick E. Molony Professor, Department of Economics, Auburn University, 138 Miller Hall, Auburn, AL 36849, USA)

  • Zhang Shuwei

    (Assistant Professor, Department of Economics, 203 Hepburn, 23 Romoda Dr., St. Lawrence University, Canton, NY 13617, USA)

Abstract

This paper studies the dynamic effects of the fiscal policy shock on private activity using an array of vector autoregressive models for the post-war U.S. data. We are particularly interested in the role of consumer sentiment in the transmission of fiscal stimulus. Our major findings are as follows. Private spending fails to rise persistently in response to government spending shocks, while they exhibit persistent and significant increases when the sentiment shock occurs. Employing not only linear but also nonlinear state-dependent VAR model estimations, we show that the government spending shock generates consumer pessimism in all phases of business cycle resulting in subsequent decreases in private activity, which ultimately weakens the effectiveness of the fiscal policy. Our counterfactual simulation exercises confirm the important role of sentiment in propagating fiscal stimulus to private spending.

Suggested Citation

  • Jia Bijie & Kim Hyeongwoo & Zhang Shuwei, 2022. "Assessing the Role of Sentiment in the Propagation of Fiscal Stimulus," The B.E. Journal of Macroeconomics, De Gruyter, vol. 22(2), pages 699-728, June.
    • Handle: RePEc:bpj:bejmac:v:22:y:2022:i:2:p:699-728:n:2
    DOI: 10.1515/bejm-2020-0198
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    Cited by:

    1. Kim, Hyeongwoo & Shao, Peng & Zhang, Shuwei, 2023. "Policy coordination and the effectiveness of fiscal stimulus," Journal of Macroeconomics, Elsevier, vol. 75(C).
    2. Hyeongwoo Kim & Deockhyun Ryu & Jisoo Son, 2023. "Fiscal Policy Effects on U.S. Labor Market," Journal of Economic Development, The Economic Research Institute, Chung-Ang University, vol. 48(1), pages 85-110.

    More about this item

    Keywords

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    JEL classification:

    • 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

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