The Transmission Channels of Government Spending Uncertainty

Anna Belianska (1) , Aurélien Eyquem (2, 3) , Céline Poilly (1, 4, 5)

1 AMSE - Aix-Marseille Sciences Economiques
2 GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne
3 IUF - Institut universitaire de France
4 CEPR - Center for Economic Policy Research
5 DIW Berlin - German Institute for Economic Research

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.

Mots clés: government spending uncertainty; stochastic volatility; portfolio adjustment cost

Domaines: Economies et finances

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