Government Spending News and Surprise Shocks: It's The Timing and Persistence

Abstract

We identify government spending news and surprise shocks based on the Survey of Professional Forecasters (SPF) data. After an analytical and empirical clarification of the natures of two news measures in Ramey (2011b), we show that a measure of the news shock for the recent sample period is still needed. Moreover, we find that news and surprise shocks may differ not only in timing but also in the level of persistence of government spending responses. Given these findings, we construct a present discounted value measure to capture government spending news shock of high persistence properly. The effects of the news shock are strikingly differ from those of the surprise shock. News shock has a significant expansionary effect on GDP, hours worked, real wage, consumption, and investment, whereas surprise shock has a contractionary effect. These results contrast with previous findings (Ramey, 2011b) and are inconsistent with the neoclassical view emphasizing the negative wealth effect.