This contribution 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 found 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.
Cavallari, L., Romano, S. (2018). Foresight and the macroeconomic impact of fiscal policy: Evidence for France, Germany and Italy. ON-LINE JOURNAL MODELLING THE NEW EUROPE(25), 27-59 [10.24193/OJMNE.2018.25.02].