We employ a maximum forecast error variance VAR identification strategy to examine the effects of anticipated government spending expansions. In our post-1981 U.S. sample, an anticipated expansion in government spending is delayed and persistent. This expansion is associated with increases in consumption and investment, as well as in real wages and hours. It also has an accelerator effect on private capital investment and a delayed stimulative effect on private sector productivity. Moreover, the monetary and tax policies accompanying the anticipated government spending expansion align well with the Fedʼs dual mandate and with less progressive federal tax reforms, respectively.
Nam et al. (2024) studied this question.