Series: Working Papers. 1508.
Author: Joan Paredes, Javier J. Pérez and Gabriel Perez-Quirós.
Published in: Journal of Applied Econometrics, Volume 38, Issue 4, June/July 2023, pp 472-492
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Abstract
Should rational agents take into consideration government policy announcements? A skilled agent (an econometrician) could set up a model to combine the following two pieces of information in order to anticipate the future course of fiscal policy in real-time: (i) the ex-ante path of policy as published/announced by the government; (ii) incoming, observed data on the actual degree of implementation of ongoing plans. We formulate and estimate empirical models for a number of EU countries (Germany, France, Italy and Spain) to show that government (consumption) targets convey useful information about ex-post policy developments when policy changes significantly (even if past credibility is low) and when there is limited information about the implementation of plans (e.g. at the beginning of a fiscal year). In addition, our models are instrumental in unveiling the current course of policy in real time. Our approach complements a well-established branch of the literature that finds politically motivated biases in policy targets.