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Fiscal Policy Uncertainty and its Effects on the Real Economy: German Evidence

Author

Listed:
  • Robert L. Czudaj

    (Department of Economics, Chemnitz University of Technology)

  • Joscha Beckmann

    (University of Greifswald, Department o Economics)

Abstract

This paper introduces a new measure of fiscal policy uncertainty based on the disagreement among professional forecasters. We analyze different patterns of this measure for the German economy for a sample period from November 1995 to April 2018 and also use Italian data for comparison. Especially, we examine the impact of the introduction of the German ‘debt brake’ on fiscal policy uncertainty. Finally, we conduct an impulse response analysis to investigate the effectof fiscal policy uncertainty on the real economy and we provide robust evidence that fiscal policy uncertainty significantly decreases the growth rate of industrial production. The corresponding effect is robust to various sensitivity checks and exceeds the impact of a general measure of economic policy uncertainty. In general, the negative effect on the real economy might be explained by lower hiring and investment by firms, higher costs of financing due to risk premia and lower consumption spending as a result of precautionary savings.

Suggested Citation

  • Robert L. Czudaj & Joscha Beckmann, 2020. "Fiscal Policy Uncertainty and its Effects on the Real Economy: German Evidence," Chemnitz Economic Papers 039, Department of Economics, Chemnitz University of Technology, revised Oct 2020.
  • Handle: RePEc:tch:wpaper:cep039
    as

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    File URL: https://www.tu-chemnitz.de/wirtschaft/vwl1/RePEc/download/tch/wpaper/CEP039_German.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Niels Gillmann & Alexander Hilgenberg, 2021. "Wie man wirtschaftliche Unsicherheit empirisch messen kann – Eine Darstellung am Beispiel von Deutschland," ifo Dresden berichtet, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 28(02), pages 24-29, April.

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    More about this item

    Keywords

    Disagreement; Expectations; Fiscal policy; Survey data; Uncertainty; VAR;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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