Government Spending Policy Uncertainty and Economic Activity: U.S. Time Series Evidence

Abstract

What are the macroeconomic consequences of fiscal policy uncertainty? Recently, many economists and policy makers are concerned about the adverse effects that uncertainty in fiscal policy has on economic activity. In the U.S., for example, the debt-ceiling crisis and the federal government shutdown have ele- vated government spending policy uncertainty and people are concerned about consequent adverse effects. In Europe, people are concerned about uncertainty in the future path of spending and tax policy, due to the escalated government debt level after the European debt crisis. Recently, uncertainty about the timing of a consumption tax hike and consequent changes in private consumption is one of the big issues in Japan. This paper seeks to discover how large such adverse effects of fiscal policy uncertainty, especially government spending policy uncertainty, are and what the transmission channels are.