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Assessing the Effects of Fiscal Policy News under Imperfect Information: Evidence from Aggregate and Individual Data

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Abstract

We study the transmission of fiscal policy under imperfect information where government spending is composed by permanent and transitory components. Agents learn about the previous processes by only observing overall public spending and a noisy signal. Under this setting and employing maximum likelihood techniques, we construct a novel measure of fiscal policy news and show that the estimated variable agrees with the historical narrative evidence for the U.S. economy. We then use macro and micro datasets to document the effects of this proxy on real wages and consumption. The qualitative responses obtained with aggregate data are significantly the same as those using individual PSID data at the median of the empirical distributions – on impact, real consumption falls and real wages do not move, whereas both increase after one year. A potential explanation for these results relies on expectations about future policy adjustments. When we consider the tails of the distributions, real wages fall (rise) upon impact for rich (poor) households. However, the effects on consumption only differ at longer horizons where poor households increase consumption more persistently than those at the top of the distribution.

Suggested Citation

  • Luisa Corrado & Edgar Silgado-Gómez, 2018. "Assessing the Effects of Fiscal Policy News under Imperfect Information: Evidence from Aggregate and Individual Data," CEIS Research Paper 447, Tor Vergata University, CEIS, revised 06 Nov 2018.
    • Handle: RePEc:rtv:ceisrp:447
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    References listed on IDEAS

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    1. Olivier J. Blanchard & Jean-Paul L'Huillier & Guido Lorenzoni, 2013. "News, Noise, and Fluctuations: An Empirical Exploration," American Economic Review, American Economic Association, vol. 103(7), pages 3045-3070, December.
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    More about this item

    Keywords

    Fiscal Policy News; Imperfect Information; Aggregate Data; PSID.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • 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
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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