This paper provides evidence in support of the hypothesis that …fiscal policy is largely anticipated and its effects depend on the extent to which policy is able to affect expectations. Based on a set of 2-country Bayesian VAR models between major European economies, we …nd that a surprise stimulus triggers expectations of defi…cit reversals that may crowd out private expenditure. An anticipated stimulus, on the contrary, is found to boost domestic activity in all samples. Moreover, it has positive cross-border effects in 50 percent of the cases. Overall, our …findings suggest that …fiscal policy is effective when it is not “crowded out ”by expectations of reversals. We document such crowding out effects in Italy and France. Finally, we argue that predictability has important consequences for the design of discretionary policy.

Cavallari, L., Romano, S. (2017). Fiscal policy in Europe: the importance of being predictable. ECONOMIC MODELLING, 60, 81-97 [10.1016/j.econmod.2016.09.008].

Fiscal policy in Europe: the importance of being predictable

CAVALLARI, Lilia;ROMANO, SIMONE
2017-01-01

Abstract

This paper provides evidence in support of the hypothesis that …fiscal policy is largely anticipated and its effects depend on the extent to which policy is able to affect expectations. Based on a set of 2-country Bayesian VAR models between major European economies, we …nd that a surprise stimulus triggers expectations of defi…cit reversals that may crowd out private expenditure. An anticipated stimulus, on the contrary, is found to boost domestic activity in all samples. Moreover, it has positive cross-border effects in 50 percent of the cases. Overall, our …findings suggest that …fiscal policy is effective when it is not “crowded out ”by expectations of reversals. We document such crowding out effects in Italy and France. Finally, we argue that predictability has important consequences for the design of discretionary policy.
Cavallari, L., Romano, S. (2017). Fiscal policy in Europe: the importance of being predictable. ECONOMIC MODELLING, 60, 81-97 [10.1016/j.econmod.2016.09.008].
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11590/299403
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