Marleau Seminar by Prof. Guido Ascari (Dutch National Bank and University of Pavia) - Government spending and fiscal foresight

For more information about our speaker Guido Ascari, please consult his webpage.

Abstract

The talk will focus on the effects of government spending and whether they depend on expectations of future taxes, a central tenet of the fiscal theory of the price level.

Employing two different effective measures of future tax expectations in a local projection analysis on post-war U.S. data reveals that the effects of an anticipated government spending shock depend solely on expectations about future taxes. In contrast, tax foresight does not affect the transmission of unanticipated shocks. When agents expect taxes to rise (fall), the economy response to an anticipated government spending shock aligns with a monetary (fiscal) regime. Hence, tax foresight is a sufficient statistic to identify the effects of anticipated government spending shocks. We argue that this is consistent with recent literature on monetary and fiscal policy interaction. 

Moreover, we investigate which specific spending categories of the U.S. Federal Budget generate the largest non-Ricardian effects, characterized by strong inflationary pressures. Changes in discretionary spending, particularly in National Defense, exhibit pronounced non-Ricardian effects primarily during periods when funding for this category is rapidly diminishing or scarce. Limited funding for military expenditures undermines the credibility of fiscal support, leading to inflation.  Variations in mandatory spending, especially Medicare and Medicaid, typically lead to Ricardian effects on output and inflation, regardless of the financing strain for this category. Social Security spending tends to produce more substantial inflationary effects when resources for expanding this type of spending are abundant.