Signals from the government: Policy disagreement and the transmission of fiscal shocks |
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| Institution: | 1. Confindustria, Viale dell’Astronomia 30, Roma 00144, Italy;2. ECARES, SBS-EM, Université Libre de Bruxelles, Avenue F.D. Roosevelt 42, 1050 Brussels, Belgium;3. Department of Economics, London Business School, Regent’s Park, NW1 4SA London, United Kingdom;4. CEPR, 33 Great Sutton St, Clerkenwell, London EC1V 0DX, United Kingdom;5. Department of Economics, The University of Warwick, The Social Sciences Building, Coventry, West Midlands CV4 7AL, United Kingdom;6. OFCE – Sciences Po, 10 Place de Catalogne, 75014, Paris, France |
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| Abstract: | We investigate the effects of fiscal policy communication on the propagation of government spending shocks. To this aim, we propose a new index measuring the coordination effects of policy communication on private agents? expectations. This index is based on the disagreement amongst US professional forecasters about future government spending. The underlying intuition is that a clear fiscal policy communication can coalesce expectations, reducing disagreement. Results indicate that, in times of low disagreement, the output response to fiscal spending innovations is positive and large, mainly due to private investment response. Conversely, periods of elevated disagreement are characterised by muted output response. |
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| Keywords: | Disagreement Government spending shock Fiscal transmission mechanism |
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