The effect of anticipated and unanticipated fiscal shocks in Peru

The aim of this research is to estimate the effect of public spending on economic activity, taking into account that changes in public spending could be anticipated by economic agents. The public spending shock is identified recursively from a vector autoregressive model (VAR) that includes a variable capturing the anticipated component of public spending. To measure this anticipated component, projections of public spending published in the Inflation Reports of the Central Reserve Bank of Peru since 2002 are used. The results show that an unanticipated public spending shock positively affects real GDP and real consumption. This effect is overestimated when the variable capturing the anticipated component of public spending is not included. Furthermore, shocks to public spending projections, which can be understood as news shocks, also positively impact consumption and output. Finally, it is shown that these results are robust to including nonlinear effects through the estimation of VAR models with changing parameters and stochastic volatility (TVP-VAR-SV).