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Foresight And The Macroeconomic Impact Of Fiscal Policy: Evidence For France, Germany And Italy

Listed author(s):
  • Lilia Cavallari

    (Università degli studi Roma Tre)

  • Simone Romano

    (Università degli studi Roma Tre)

This paper provides evidence in support of the hypothesis that fiscal policy is largely anticipated and its effects depend on expectations. Based on a 2-country Bayesian VAR model between major European economies, we find that an unanticipated fiscal stimulus leads to expectations of strong deficit reversals. This in turn depresses domestic and foreign activity. Foresight shocks, on the contrary, have positive effects on domestic activity. Differences in the responses to surprise and foresight shocks reflect the role of expectations. The evidence in our study is consistent with a regime where deficit reversals are mainly based on taxation alone.

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File URL: http://host.uniroma3.it/centri/crei/pubblicazioni/workingpapers2016/CREI_02_2016.pdf
File Function: First version, 2016
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Paper provided by CREI Università degli Studi Roma Tre in its series Working Papers with number 0216.

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Length: 32 pages
Date of creation: 2016
Date of revision: 2016
Handle: RePEc:rcr:wpaper:02_16
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