Must-Read: Ruddier Bachmann and Eric Sims: Confidence and the Transmission of Government Spending Shocks

Must-Read: Ruddier Bachmann and Eric Sims: Confidence and the Transmission of Government Spending Shocks:

In a standard structural VAR, an empirical measure of confidence does not significantly react to spending shocks and output multipliers are around one…

In a non-linear VAR, confidence rises following an increase in spending during periods of economic slack and multipliers are much larger. The systematic response of confidence is irrelevant for the output multiplier during normal times, but is critical during recessions. Spending shocks during downturns predict productivity improvements through a persistent increase in government investment relative to consumption, which is reflected in higher confidence.