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Government Spending Policy Uncertainty and Economic Activity: U.S. Time Series Evidence

Author

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  • Kim, Wongi

    (Korea Institute for International Economic Policy)

Abstract

In this paper, I empirically examine the effects of uncertainty about government spending policy on economic activity using U.S. time series data. To this end, I constructed government spending policy uncertainty indexes and estimate proxy SVAR model. Proxy SVAR model with constructed indexes shows that an increase in government spending policy uncertainty has negative, sizable, and prolonged effects on economic activity. Moreover, the results imply that the commonly adopted recursive SVAR model in literature on policy uncertainty systematically underestimates the adverse effect of government spending policy uncertainty because of the endogeneity issue. One policy suggestion based on the empirical finding is clear announcement of future government spending path.

Suggested Citation

  • Kim, Wongi, 2016. "Government Spending Policy Uncertainty and Economic Activity: U.S. Time Series Evidence," Working Papers 16-10, Korea Institute for International Economic Policy.
    • Handle: RePEc:ris:kiepwp:2016_010
    DOI: 10.2139/ssrn.2901382
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    More about this item

    Keywords

    Policy Uncertainty; Government Spending Policy Uncertainty Index; Government Spending Policy Uncertainty Shock; Proxy SVAR;
    All these keywords.

    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
    • 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; Modern Monetary Theory

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