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The economic effects of government spending: using expectations data to control for information

Published online by Cambridge University Press:  30 July 2021

Matthew Hall  and
Aditi Thapar
Matthew Hall
Affiliation:
Boston Consulting Group
Aditi Thapar*
Affiliation:
University of Michigan, Ann Arbor, MI 48104, USA
*
*Corresponding author. Email: aditi@aditithapar.com
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Abstract

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We present a new methodology that uses professional forecasts to estimate the effects of fiscal policy. We use short-term forecasts to better identify exogenous shocks to government spending by controlling for anticipatory information already in the public domain. We use longer-term forecasts to net out expectations from the future path of other variables, which improves accuracy and efficiency by focusing on more precise measures of the impact of shocks. We show that this improves the statistical fit relative to both local projection methods and vector autoregression-based analyses that do not control for the entire future path of expectations.

Keywords

Fiscal policymultipliersimpulse responseforecastsE62E30H30
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 1 , January 2023 , pp. 141 - 170
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© Cambridge University Press 2021

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