Discussion paper

DP15894 The Transmission Channels of Government Spending Uncertainty

Higher uncertainty about government spending generates a persistent decline in the economic activity in the Euro Area. This paper emphasizes the transmission channels explaining this empirical fact. First, a Stochastic Volatility model is estimated on European government consumption to build a measure of government spending uncertainty. Plugging this measure into a SVAR model, we stress that government spending uncertainty shocks have recessionary, persistent and humped-shaped effects. Second, we develop a New Keynesian model with financial frictions applying to a portfolio of equity and long-term government bonds. We argue that a portfolio effect -- resulting from the imperfect substitutability among both assets -- acts as a critical amplifier of the usual transmission channels.


Anna, B, A Eyquem and C Poilly (2021), ‘DP15894 The Transmission Channels of Government Spending Uncertainty‘, CEPR Discussion Paper No. 15894. CEPR Press, Paris & London. https://cepr.org/publications/dp15894