Foresight and the Macroeconomic Impact of Fiscal Policy: Evidence for France, Germany and Italy

Lilia Cavallari,Simone Romano

doi:10.24193/ojmne.2018.25.02

Abstract

This paper provides evidence in support of the hypothesis that fiscal policy is largely anticipated and its effects depend on expectations. Based on a 2-country Bayesian VAR model between major European economies, we find that an unanticipated fiscal stimulus leads to expectations of strong deficit reversals. This in turn depresses domestic and foreign activity. Foresight shocks, on the contrary, have positive effects on domestic activity. Differences in the responses to surprise and foresight shocks reflect the role of expectations. The evidence in our study is consistent with a regime where deficit reversals are mainly based on taxation alone.

Highlights

Evidence about the macroeconomic impact of fiscal policy is abundant yet controversial
We provide evidence in support of the hypothesis that fiscal policy is largely anticipated and its effects depend on expectations about future policy actions
This paper has provided evidence in support of the hypothesis that fiscal policy is largely anticipated and its effects depend on expectations about future policy actions

Summary

Introduction

Evidence about the macroeconomic impact of fiscal policy is abundant yet controversial. We will assess the extent to which publicly available forecasts of the government balance in Italy, France and Germany provide information about future policy developments and their role for the identification of structural shocks. For this purpose, we use the European Commission Forecasts, ECF . The model is estimated separately for each country pair over the period 1971-2011.10 The estimated deficit shocks are used to perform the orthogonality test They are regressed on five sets of regressors, including the series reported by the ECF and the indicators (1), (2) and (3), considered one at a time. We propose a methodology to shed some light on the question

Data We use annual data for Germany, Italy and

Results

Conclusions