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Fiscal Foresight, Limited Information and the Effects of Government Spending Shocks


  • Matteo Fragetta

    () (University of Salerno, Department of Economics and Statistics)

  • Emanuel Gasteiger

    () (ISCTE-IUL, Business School, Department of Economics and BRU-IUL)


We quantify the impact of government spending shocks in the US. Thereby, we control for fiscal foresight by utilizing the narrative approach. Moreover, we surmount the generic limited information problem inherent in vector autoregressions (VARs) by a factor-augmented VAR (FAVAR) approach. We find that a positive deficit-financed defense shock raises output by more than in a VAR (e.g. 2.61 vs. 2.04 for peak multipliers). Furthermore, our evidence suggests that consumption is crowded in. These results are robust to different variants of controlling for fiscal foresight and reveal the crucial role of the limited information problem in fiscal VARs.

Suggested Citation

  • Matteo Fragetta & Emanuel Gasteiger, 2012. "Fiscal Foresight, Limited Information and the Effects of Government Spending Shocks," Working Papers Series 2 12-02, ISCTE-IUL, Business Research Unit (BRU-IUL).
  • Handle: RePEc:isc:iscwp2:bruwp1202

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    Cited by:

    1. C. Glocker & G. Sestieri & P. Towbin, 2017. "Time-varying fiscal spending multipliers in the UK," Working papers 643, Banque de France.
    2. DI SERIO, Mario & FRAGETTA, Matteo & GASTEIGER, Emanuel, 2017. "The Government Spending Multiplier at the Zero Lower Bound: Evidence from the United States," CELPE Discussion Papers 150, CELPE - Centre of Labour Economics and Economic Policy, University of Salerno, Italy.

    More about this item


    FAVAR; Fiscal Foresight; Limited Information; Fiscal Policy; Government Spending; Consumption;

    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
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • 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
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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