Fiscal Policy Uncertainty and the Business Cycle: Time Series Evidence from Italy

Abstract

Economic uncertainty is an important factor behind macroeconomic fluctuations: in an uncertain environment, firms reduce hiring and investment, financial intermediaries are more reluctant to lend and households increase their propensity to save. In the present paper, we study the effects of the uncertainty which arises from fiscal policy decisions. We propose a new measure of fiscal policy uncertainty (FPU). In particular, we estimate a fiscal reaction function, allowing the volatility of the shocks to be time-varying. The time series of this volatility is our proxy for FPU. Looking at Italian data over the period 1981-2014, we find that an unexpected increase in our FPU measure has a negative impact on the economy. One implication of this result is that the same change in the government budget can have different effects depending on whether it is associated with a reduction or an increase in FPU. Therefore, the neglect of FPU may partly explain why the size (and sign) of fiscal multipliers differs so much across existing empirical studies.

Parameter Heterogeneity, Persistence and Cross-Sectional Dependence: New Insights on Fiscal Policy Reaction Functions for the Euro Area

“…Fatas and Mihov (2003), Fernandez-Villaverde et al (2015, and Anzuini et al (2017). 12 Conversely, Schoder (2014) studies of FPRF with medium-long spans of quarterly ex post data (partially interpolated from annual observations).…”

Fiscal policy in the US: a new measure of uncertainty and its effects on the American economy

“…An environment characterized by low fiscal uncertainty is therefore key to the success of expansionary policies and even to a smooth implementation of contractionary ones. Anzuini et al (2020) show that the benign effects of standard expansionary policies in Italy might well be offset by the contractionary ones stemming from their uncertain implementation. Government expenditures and tax revenues make up a sizable portion of most countries' GDP, meaning that substantial uncertainty regarding those figures can well make a large difference in shaping many economic agents' decisions, thereby giving fiscal uncertainty a prominent role into the transmission of fiscal policy.…”

“…2 Theoretical discussion of the adverse effects of government's procrastination can be found in Gomes et al (2012). 3 For an application to the Italian economy see Anzuini et al (2020).…”

“…This strand of literature first started with Fernández-Villaverde and Rubio-Ramírez (2007) and Justiniano and Primiceri (2008) who estimated structural macroeconomic models with stochastic volatility and paved the way to model-based approaches for retrieving uncertainty. See also later contributions in Fernández-Villaverde and Rubio-Ram (2010), Fernández-Villaverde et al (2010), Fernández-Villaverde et al (2011), Bekaert et al (2013), Born and Pfeifer (2014), Fernández-Villaverde et al (2015a), Fernández-Villaverde et al (2015b),Scotti (2016),Anzuini et al (2020),Berger et al (2017),Creal and Wu (2017) andCarriero et al (2018) for further examples of model-based approaches.…”

Fiscal policy uncertainty and its effects on the real economy: German evidence

“…However, no comparable measure is available for other economies. Other studies use indirect model based proxies or reaction functions to capture fiscal policy uncertainty which are discussed in Section 2 (Fernández-Villaverde et al, 2015;Anzuini et al, 2020;Popiel, 2020).…”