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The Transmission Channels of Government Spending Uncertainty

Abstract

Higher uncertainty about government spending generates a persistent decline in the economic activity in the Euro Area. This paper emphasizes the transmission channels explaining this empirical fact. First, a Stochastic Volatility model is estimated on European government consumption to build a measure of government spending uncertainty. Plugging this measure into a SVAR model, we stress that government spending uncertainty shocks have recessionary, persistent and humped-shaped effects. Second, we develop a New Keynesian model with financial frictions applying to a portfolio of equity and long-term government bonds. We argue that a portfolio effect-resulting from the imperfect substitutability among both assets-acts as a critical amplifier of the usual transmission channels.
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Dates and versions

halshs-03160370 , version 1 (05-03-2021)

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  • HAL Id : halshs-03160370 , version 1

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Anna Belianska, Aurélien Eyquem, Céline Poilly. The Transmission Channels of Government Spending Uncertainty. 2021. ⟨halshs-03160370⟩
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