Economic policy uncertainty and government spending multipliers

We examine the impact of Economic Policy Uncertainty (EPU) on the effectiveness of government spending using a local projection method with an endogenously determined threshold parameter. The empirical analysis reveals that government spending multipliers are larger during low EPU periods compared to those in high EPU periods. This result is robust when government spending shocks are identified using government spending news constructed based on survey of professional forecasters data. Our study calls for policy expectation management as a company effort together with fiscal stimulus.(c) 2022 Elsevier B.V. All rights reserved.