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Confidence and the transmission of government spending shocks

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  • Bachmann, Rüdiger
  • Sims, Eric R.

Abstract

Is impacting confidence an important channel by which government spending shocks affect economic activity? In a standard structural VAR, an empirical measure of confidence does not significantly react to spending shocks and output multipliers are around one. In a non-linear VAR, confidence rises following an increase in spending during periods of economic slack and multipliers are much larger. The systematic response of confidence is irrelevant for the output multiplier during normal times, but is critical during recessions. Spending shocks during downturns predict productivity improvements through a persistent increase in government investment relative to consumption, which is reflected in higher confidence.

Suggested Citation

  • Bachmann, Rüdiger & Sims, Eric R., 2012. "Confidence and the transmission of government spending shocks," Journal of Monetary Economics, Elsevier, vol. 59(3), pages 235-249.
  • Handle: RePEc:eee:moneco:v:59:y:2012:i:3:p:235-249
    DOI: 10.1016/j.jmoneco.2012.02.005
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    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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