Pre-announcement and Timing - The Effects of a Government Expenditure Shock

Open Access

Abstract

This paper investigates the effect of a government expenditure shock on consumption and real wages. I identify the shock by exploiting its pre-announced nature, i.e. different signs of the responses in investment, hours worked and output during the announcement and after the realization of the shock. Since pre-announcement leads to a non-stationary moving average representation, I estimate and identify a VMA model. The identifying restrictions are derived from a DSGE model, which is estimated by matching the impulse response functions of the VMA model. Private consumption is found to respond negatively during the announcement period and positively after the realization. The reaction of real wages is significantly positive on impact, decreases during the announcement horizon, and is again significantly positive for two quarters after the realization.