IS FISCAL POLICY MORE EFFECTIVE IN UNCERTAIN TIMES OR DURING RECESSIONS? Mario Alloza. Documentos de Trabajo N.º 1730

IS FISCAL POLICY MORE EFFECTIVE IN UNCERTAIN TIMES OR DURING RECESSIONS? 27 Mario Alloza Documentos de Trabajo N.º 73

IS FISCAL POLICY MORE EFFECTIVE IN UNCERTAIN TIMES OR DURING RECESSIONS?

IS FISCAL POLICY MORE EFFECTIVE IN UNCERTAIN TIMES OR DURING RECESSIONS? (*) Mario Alloza (**) BANCO DE ESPAÑA AND CFM (*) I am grateful to Morten Ravn for valuable advice and to Marco Bassetto, Giancarlo Corsetti, Wouter den Haan, Pedro Gomes, Valerie Ramey, Vincent Sterk, Mirko Wiederholt and seminar and conference participants at UCL, University of Cambridge Macroeconomics Workshop, Stockholm School of Economics, ENTER Jamboree 25, the 9th Nordic Summer Symposium in Macroeconomics and Bank of Spain for insightful comments. (**) Mario Alloza: Banco de España, Calle Alcalá 48, 284, Madrid (Spain), m.alloza@bde.es. Documentos de Trabajo. N.º 73 27

The Working Paper Series seeks to disseminate original research in economics and fi nance. All papers have been anonymously refereed. By publishing these papers, the Banco de España aims to contribute to economic analysis and, in particular, to knowledge of the Spanish economy and its international environment. The opinions and analyses in the Working Paper Series are the responsibility of the authors and, therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem. The Banco de España disseminates its main reports and most of its publications via the Internet at the following website: http://www.bde.es. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. BANCO DE ESPAÑA, Madrid, 27 ISSN: 579-8666 (on line)

Abstract This paper estimates the impact of government spending shocks on economic activity during periods of high and low uncertainty and during periods of boom and recession. We fi nd that government spending shocks have larger impacts on output in booms than in recessions and larger impacts during tranquil times than during uncertain times. The results suggest that confi dence plays an important role in explaining this differential impact. Keywords: fi scal policy, vector autoregressions, uncertainty. JEL classification: E62, E32, C32.

Resumen En este documento se estima el impacto de cambios exógenos en el gasto público sobre la actividad económica durante períodos de alta y baja incertidumbre, y durante períodos de expansiones y recesiones. Se encuentra que el efecto del gasto público sobre el PIB es de mayor magnitud durante períodos expansivos que durante recesiones, y más grande durante períodos de baja incertidumbre que durante períodos de turbulencia económica. Los resultados obtenidos sugieren que la confi anza sobre las perspectivas económicas desempeña un papel relevante a la hora de explicar este efecto diferencial de la política fi scal. Palabras clave: política fi scal, vector autorregresivo, incertidumbre. Códigos JEL: E62, E32, C32.

BANCO DE ESPAÑA 7 DOCUMENTO DE TRABAJO N.º 73

BANCO DE ESPAÑA DOCUMENTO DE TRABAJO N.º 73

x t = B L (L)x t +(B H (L) B L (L)) H t x t + e t e t = D t ε t D t =(D L + D H H t ) x t =[g t,y t,tr t ] e t N(, D t D t) ε t N(, I) B(L) =(I B L B 2 L 2...B p L p ) p H t H t = B L (L) H t = B H (L) D t D L ) D H p =4 H t H t BANCO DE ESPAÑA DOCUMENTO DE TRABAJO N.º 73

D t B (L) =B H (L) B L (L) ε g t p g t = β g,j x t j + ε g t j= H t = x t = B(L)x t + Dε t % 2 ˆB H (L) ˆB L (L) ê t BANCO DE ESPAÑA 2 DOCUMENTO DE TRABAJO N.º 73

H t.48 H t. BANCO DE ESPAÑA 3 DOCUMENTO DE TRABAJO N.º 73

ε Ramey t x t = B(L)x t + C(L)H t ε Ramey t + D(L)( H t )ε Ramey t + ξ t B(L) p C(L) D(L) q ξ t H t ε Ramey t H t = x t = B(L)x t + F (L)ε Ramey t + ξ t q =2 H t ε Ramey t C(L) H t = D(L) ε Ramey t BANCO DE ESPAÑA 4 DOCUMENTO DE TRABAJO N.º 73

% 2 H t H t BANCO DE ESPAÑA 5 DOCUMENTO DE TRABAJO N.º 73

x t BANCO DE ESPAÑA 6 DOCUMENTO DE TRABAJO N.º 73

x t = ( ) Ht AG CB (L)x t + HtC AG R x t + e t H AG t = exp( γz t) +exp( γz t ) e t N (, Ω B ( H AG t var(z t )= E(z t )= ) ( )) + ΩR H AG t x t Ω B Ω R C B (L) C R (L) Ht AG z t Ht AG j H AG t BANCO DE ESPAÑA 8 DOCUMENTO DE TRABAJO N.º 73

t t +(j )/2 BANCO DE ESPAÑA 9 DOCUMENTO DE TRABAJO N.º 73

h BANCO DE ESPAÑA 2 DOCUMENTO DE TRABAJO N.º 73

7. BANCO DE ESPAÑA 2 DOCUMENTO DE TRABAJO N.º 73

h [ ] x t+h = H t αl,h + β L,h x t + δ L,h ε G t + ( H t ) [ ] α H,h + β H,h x t + δ H,h ε G t + et+h x t =[g t,y t,tr t ] x t x t h δ L,h x t ε G t L δ H,h H L H δ L,h δ H,h h ε G t BANCO DE ESPAÑA 22 DOCUMENTO DE TRABAJO N.º 73

.25.2.5..5.5..5 GDP (LINEAR) 4 8 2 6 2.4.2.8.6.4.2 GOV (LINEAR) 4 8 2 6 2.2...2.3.4 TAXREV (LINEAR) 4 8 2 6 2 BANCO DE ESPAÑA 3 DOCUMENTO DE TRABAJO N.º 73

.5 GDP (LU) GOV (LU).5 TAXREV (LU).5.5.5.5 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2.5 GDP (HU) GOV (HU).5 TAXREV (HU).5.5.5.5 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2 BANCO DE ESPAÑA 3 DOCUMENTO DE TRABAJO N.º 73

...2 GDP (B).5.5 GOV (B).4.2.2.4 TAXREV (B).3 4 8 2 6 2 4 8 2 6 2.6 4 8 2 6 2...2 GDP (R).5.5 GOV (R).4.2.2.4 TAXREV (R).3 4 8 2 6 2 4 8 2 6 2.6 4 8 2 6 2.3 GDP (LINEAR).6 GOV (LINEAR) TAXREV (LINEAR).2.4.2.2..8.6.2..2 4 8 2 6 2.4.2 4 8 2 6 2.4.6 4 8 2 6 2 BANCO DE ESPAÑA 32 DOCUMENTO DE TRABAJO N.º 73

.4 GDP (LU) 2 GOV (LU).5 TAXREV (LU).2.2.5.5.4.6.5.4 4 8 2 6 2 GDP (HU) 2 4 8 2 6 2 GOV (HU).5 4 8 2 6 2 TAXREV (HU).2.2.5.5.4.6.5 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2 BANCO DE ESPAÑA 33 DOCUMENTO DE TRABAJO N.º 73

GDP (B) GOV (B) TAXREV (B).2 2.5.2.5.4.6.8.5.5.5.2 4 8 2 6 2 GDP (R) 4 8 2 6 2 GOV (R) 4 8 2 6 2 TAXREV (R).2 2.5.2.5.4.6.8.5.5.5.2 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2 BANCO DE ESPAÑA 34 DOCUMENTO DE TRABAJO N.º 73

CONFIDENCE (CCI) (LU) CONFIDENCE (MICHIGAN) (LU) INDUSTRIAL CONF. (LU) 2 2.2 2 4 6 8 4 8 2 6 2 2 3 4 8 2 6 2.2.4.6.8 4 8 2 6 2 CONFIDENCE (CCI) (HU) CONFIDENCE (MICHIGAN) (HU) INDUSTRIAL CONF. (HU) 2 2.2 2 4 6 8 4 8 2 6 2 2 3 4 8 2 6 2.2.4.6.8 4 8 2 6 2 BANCO DE ESPAÑA 35 DOCUMENTO DE TRABAJO N.º 73

CONSUMPTION (LU) EXP INFLATION (LU) INTEREST RATE (LU).2.4.2.2.2.4.6.2.4.6.8.2.4.6.8 4 8 2 6 2 4 8 2 6 2.8 4 8 2 6 2 CONSUMPTION (HU) EXP INFLATION (HU) INTEREST RATE (HU).2.4.2.2.2.4.6.2.4.6.8.2.4.6.8 4 8 2 6 2 4 8 2 6 2.8 4 8 2 6 2 BANCO DE ESPAÑA 36 DOCUMENTO DE TRABAJO N.º 73

GDP (Boom) GOV (Boom) oercent oercent GDP (Recession) GOV (Recession) BANCO DE ESPAÑA 37 DOCUMENTO DE TRABAJO N.º 73

GDP (Boom) GOV (Boom) oercent oercent GDP (Recession) GOV (Recession) BANCO DE ESPAÑA 38 DOCUMENTO DE TRABAJO N.º 73

GDP (LU).5 GOV (LU) TAXREV (LU).5.5.5.5.5 2 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2 GDP (HU).5 GOV (HU) TAXREV (HU).5.5.5.5.5 2 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2 BANCO DE ESPAÑA 39 DOCUMENTO DE TRABAJO N.º 73

GDP (LU) GOV (LU) TAXREV (LU) 2.5.5.5.5.5.5 2.5 4 8 2 6 2 GDP (HU).5 4 8 2 6 2 GOV (HU) 4 8 2 6 2 TAXREV (HU) 2.5.5.5.5.5.5 2.5 4 8 2 6 2.5 4 8 2 6 2 4 8 2 6 2 BANCO DE ESPAÑA 4 DOCUMENTO DE TRABAJO N.º 73

GDP (LU) GOV (LU) TAXREV (LU).5 2.5 2.5 2.5.5.5 5 5 2.5 5 5 2 2 5 5 2 GDP (HU) GOV (HU) TAXREV (HU).5 2.5 2.5 2.5.5.5 5 5 2.5 5 5 2 2 5 5 2 BANCO DE ESPAÑA 43 DOCUMENTO DE TRABAJO N.º 73

GDP (LU) GOV (LU) TAXREV (LU).5.5.5.5.5.5.5 2 5 5 2.5 5 5 2 2 5 5 2 GDP (HU) GOV (HU) TAXREV (HU).5.5.5.5.5.5.5 2 5 5 2.5 5 5 2 2 5 5 2 BANCO DE ESPAÑA 44 DOCUMENTO DE TRABAJO N.º 73

GDP (B) GOV (B) TAXREV (B).6.4.2.2.4.6 5 5 2 2.5.5.5 5 5 2.5.5.5 5 5 2 GDP (R) GOV (R) TAXREV (R).6.4.2.2.4.6 5 5 2 2.5.5.5 5 5 2.5.5.5 5 5 2 BANCO DE ESPAÑA 45 DOCUMENTO DE TRABAJO N.º 73

GDP (B) GOV (B) TAXREV (B) 2 5 4 3 2 2 2 2 5 5 2 2 5 5 2 3 5 5 2 GDP (R) GOV (R) TAXREV (R) 2 5 4 3 2 2 2 2 5 5 2 2 5 5 2 3 5 5 2 BANCO DE ESPAÑA 46 DOCUMENTO DE TRABAJO N.º 73

.6 GDP (LU) GOV (LU) TAXREV (LU).4.2.5.2.4.6.8 4 8 2 6 2.5.5 4 8 2 6 2.5 4 8 2 6 2.6 GDP (HU) GOV (HU) TAXREV (HU).4.2.5.2.4.6.8 4 8 2 6 2.5.5 4 8 2 6 2.5 4 8 2 6 2 BANCO DE ESPAÑA 47 DOCUMENTO DE TRABAJO N.º 73

GDP (B) GOV (B) TAXREV (B).5.2.2.4.5.5.5 2.6 2.5.8 3 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2 GDP (R) GOV (R) TAXREV (R).5.2.2.4.5.5.5 2.6 2.5.8 3 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2.2...2.3 GDP (LINEAR).6.4.2.8.6.4 GOV (LINEAR).4.2.2.4.6 TAXREV (LINEAR).4.2.8.5 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2 BANCO DE ESPAÑA 48 DOCUMENTO DE TRABAJO N.º 73

.2.2.4.6.8 GDP (LU).5.5 GOV (LU).5.5.5 TAXREV (LU).2.2.2.4.6.8 4 8 2 6 2 GDP (HU).5.5 4 8 2 6 2 GOV (HU) 2.5.5.5 4 8 2 6 2 TAXREV (HU).2 4 8 2 6 2 4 8 2 6 2 2 4 8 2 6 2 BANCO DE ESPAÑA 49 DOCUMENTO DE TRABAJO N.º 73

.2 GDP (B).5 GOV (B).5 TAXREV (B).2.5.4.5.6.5.2 4 8 2 6 2 GDP (R).5 4 8 2 6 2 GOV (R).5 4 8 2 6 2 TAXREV (R).2.5.4.5.6.5 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2 BANCO DE ESPAÑA 5 DOCUMENTO DE TRABAJO N.º 73

x t BANCO DE ESPAÑA 52 DOCUMENTO DE TRABAJO N.º 73

.2.2 GDP (LU) GOV (LU).5 TAXREV (LU).4.6.5.5.8 2 2.5 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2.2.2 GDP (HU) GOV (HU).5 TAXREV (HU).4.6.5.5.8 2 2.5 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2 BANCO DE ESPAÑA 53 DOCUMENTO DE TRABAJO N.º 73

.2. GDP (B).2 GOV (B).4.2 TAXREV (B)..8.6.2.2.4.4.3.2.6 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2.2. GDP (R).2 GOV (R).4.2 TAXREV (R)..8.6.2.2.4.4.3.2.6 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2 BANCO DE ESPAÑA 54 DOCUMENTO DE TRABAJO N.º 73

.5.5 GDP GDP (LU) (LU) GOV (LU) TAXREV TAXREV (LU) (LU).5 5.5.5.5.5.5.5.5.5 2.5 4 8 2 6 2 GDP (HU) 4 8 2 6 2 GOV (HU) 4 8 2 6 2 TAXREV (HU).5.5.5.5.5.5 2 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2 BANCO DE ESPAÑA 55 DOCUMENTO DE TRABAJO N.º 73

GDP (B) GOV (B) TAXREV (B).2.5.5.2.4.6.5.5.8.5 4 8 2 6 2 GDP (R) 4 8 2 6 2 GOV (R) 4 8 2 6 2 TAXREV (R).2.5.5.2.4.6.5.5.8.5 4 8 2 6 2 4 8 2 6 2 4 8 2 6 2 BANCO DE ESPAÑA 56 DOCUMENTO DE TRABAJO N.º 73

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