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Government Spending Shocks and Private Activity: The Role of Sentiments

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  • Bijie Jia
  • Hyeongwoo Kim

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 US data. We are particularly interested in the role of consumer sentiment in the transmission of the government spending shock. Our major findings are as follows. Private consumption and investment fail to rise persistently in response to positive spending shocks especially when shocks are anticipated, while they exhibit persistent and significant increases when the sentiment shock occurs. Employment and real wages in the private sector also respond significantly positively only to the sentiment shock. Consumer sentiment responds negatively to a positive fiscal shock, resulting in subsequent decreases in private activity. That is, our empirical findings imply that the government spending shock generates consumer pessimism, which then weakens the effectiveness of the fiscal policy.

Suggested Citation

  • Bijie Jia & Hyeongwoo Kim, 2016. "Government Spending Shocks and Private Activity: The Role of Sentiments," Auburn Economics Working Paper Series auwp2016-04, Department of Economics, Auburn University.
  • Handle: RePEc:abn:wpaper:auwp2016-04
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    References listed on IDEAS

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    Cited by:

    1. Jia, Bijie & Kim, Hyeongwoo, 2015. "Government Spending Shocks and Private Activity: The Role of Sentiments," MPRA Paper 66263, University Library of Munich, Germany.
    2. repec:eee:reveco:v:53:y:2018:i:c:p:57-70 is not listed on IDEAS

    More about this item

    Keywords

    Government Spending; Consumer Sentiment; Private Activity; Sentiment Channel; Vector Autoregressive; Expectational VAR; Survey of Professional Forecasters; Threshold VAR; Counterfactual Simulations;

    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

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