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Signals from the Government: Policy Uncertainty and the Transmission of Fiscal Shocks

  • Ricco, Giovanni
  • Callegari, Giovanni
  • Cimadomo, Jacopo

In this paper, we investigate the influence of fiscal policy uncertainty in the propagation of government spending shocks in the US economy. We propose a new index to measure fiscal policy uncertainty which relies on the dispersion of government spending forecasts as presented in the Survey of Professional Forecasters (SPF). This new index is solely focused on the uncertainty surrounding federal spending and is immune from the influence of general macroeconomic uncertainty by as much as is possible. Our results indicate that, in times of elevated fiscal policy uncertainty, the output response to policy announcements about future government spending growth is muted. Instead, periods of low policy uncertainty are characterised by a positive and persistent output response to fiscal announcements. Our analysis also shows that the stronger effects of fiscal policy in less uncertain times is mainly the result of agents’ tendency to increase investment decisions in these periods, in line with the prediction of the option value theory in Bernanke (1983).

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 56136.

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Date of creation: 2014/05
Handle: RePEc:pra:mprapa:56136
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