DP10115 Government Spending Shocks in Open Economy VARs

Author(s): Mario Forni, Luca Gambetti
Publication Date: August 2014
Keyword(s): crowding-out, fiscal foresight, fiscal policy, forecast revisions, government spending, government spending news, structual VARs, survey of professional forecasters
JEL(s): C32, E32, E62
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10115

We identify government spending news and surprise shocks using a novel identification based on the Survey of Professional Forecasters. News shocks lead to an increase of the interest rate, a real appreciation of US dollar and a worsening of the trade balance. The opposite is found for the standard surprise shock which raises government spending on impact: the currency depreciates and net exports improve. We reconcile the two conflicting results showing the different timing of the spending reversals associated with the two shocks. The effects of the news shock on government spending are much more persistent and the reversal occurs much later.