This paper takes into account the dynamic feedback between government expenditures and output in a model that separates the effects of expected and unexpected government expenditures on output. We allow for standard determinants based on Solow's growth model, as well as financial globalization and trade openness measures for a sample of 56 industrial and emerging market economies over the 1970-2004 period. We find that unanticipated government expenditures have negative and significant effects on output growth, with higher effects in developed economies. Along with savings responses, we interpret these results based on how fiscal policy reacts to business cycles. Anticipated government expenditures have negative - but smaller effects - on output growth. These results are very robust to a recursive treatment of expectations, which reinforces the role of new information in an increasingly integrated world economy.
Escobari, Diego, and André Varella Mollick. “Output Growth and Unexpected Government Expenditures.” The B.E. Journal of Macroeconomics 13, no. 1 (May 13, 2013): 481–513. https://doi.org/10.1515/bejm-2012-0072.
B.E. Journal of Macroeconomics