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Does anticipation of government spending matter? Evidence from an expectation augmented VAR

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  • Tenhofen, Jörn
  • Wolff, Guntram B.

Abstract

How does private consumption react to an exogenous increase in government expenditure? Standard structural vector autoregressions (SVARs) usually report a positive GDP as well as consumption response, while event studies report a negative consumption response. We investigate in a SVAR whether anticipation of the fiscal shock reverses the sign of this dynamic response to a negative one. As a methodological contribution, we model expectation formation within a SVAR framework. We show for the US that consumption falls in reaction to an expenditure shock once the model allows for one-period-ahead anticipation of this shock. Modelling anticipation of fiscal shocks is thus crucial to correctly capture their macroeconomic effects. Differences in results between event studies and VARs can be explained by missing anticipation in VARs. When re-estimating the two models (with and without anticipation) for non-defense related expenditures, we find a positive consumption response for both models. The implications of our results for macroeconomic theory are briefly discussed.

Suggested Citation

  • Tenhofen, Jörn & Wolff, Guntram B., 2007. "Does anticipation of government spending matter? Evidence from an expectation augmented VAR," Discussion Paper Series 1: Economic Studies 2007,14, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp1:5866
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    Cited by:

    1. Ricco, Giovanni & Ellahie, Atif, 2012. "Government Spending Reloaded: Fundamentalness and Heterogeneity in Fiscal SVARs," MPRA Paper 42105, University Library of Munich, Germany.
    2. Shafik Hebous, 2011. "The Effects Of Discretionary Fiscal Policy On Macroeconomic Aggregates: A Reappraisal," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 674-707, September.
    3. Kriwoluzky, Alexander, 2012. "Pre-announcement and timing: The effects of a government expenditure shock," European Economic Review, Elsevier, vol. 56(3), pages 373-388.
    4. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
    5. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-685, September.
    6. Caldara, Dario & Kamps, Christophe, 2008. "What are the effects of fiscal policy shocks? A VAR-based comparative analysis," Working Paper Series 877, European Central Bank.
    7. Jörn Tenhofen & Guntram B. Wolff, 2010. "Does anticipation of government spending matter? The role of (non-)defense spending," Bonn Econ Discussion Papers bgse12_2010, University of Bonn, Germany.
    8. Giancarlo Corsetti & Michael P. Devereux & Luigi Guiso & John Hassler & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2010. "Chapter 3: From Fiscal Rescue to Global Debt," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 71-100, February.
    9. Umut UNAL, 2015. "Rethinking The Effects Of Fiscal Policy On Macroeconomic Aggregates: A Disaggregated Svar Analysis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 120-135, September.
    10. Valerie A. Ramey, 2008. "Comment on "In Search of the Transmission Mechanism of Fiscal Policy"," NBER Chapters,in: NBER Macroeconomics Annual 2007, Volume 22, pages 237-246 National Bureau of Economic Research, Inc.
    11. Pedro Gomes, 2009. "Labour market effects of public sector employment and wages," 2009 Meeting Papers 313, Society for Economic Dynamics.
    12. J. Stephen Ferris, 2010. "Fiscal Policy from a Public Choice Perspective," Carleton Economic Papers 10-10, Carleton University, Department of Economics.
    13. Burgert, Matthias & Gomes, Pedro, 2011. "The Effects of Government Spending: A Disaggregated Approach," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48690, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Fiscal policy; government spending; net revenue; policy anticipation; structural vector autoregression;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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