Uncertainty and effectiveness of public consumption

This article investigates how increased uncertainty affects the effectiveness of public consumption on economic activity. The paper examines three main issues: first, the influence of uncertainty on output and macroeconomic aggregates. Second, the effects of public consumption on the economy. Third, the impact of a simultaneous shock of uncertainty and government consumption on economic activity. We use Vector Autoregression (VAR) models for the United States, Brazil and a panel VAR with six European countries. The empirical results indicate a disruptive effect of uncertainty on GDP, private consumption, investment and hours worked. The fiscal effects point to slightly different results for the two countries. For Brazil and the United States, the increase in public spending has positive and significant effects on GDP. Regarding the effects of government consumption (high uncertainty), the fiscal effects are not statistically significant, while in times of low uncertainty the effects are positive and significant. Subsequently, we designed a Dynamic Stochastic General Equilibrium (DSGE) model akin to Basu and Bundick (2017), and added three features: tax on labor income, the relationship between private consumption and government consumption and a simultaneous shock of uncertainty and government consumption. The model highlights four main conclusions. First, the negative influence of uncertainty on economic activity. Second, risk aversion magnifies the impact of the macroeconomic response. Third, public consumption has positive effects on economic activity. Finally, we examine the sensitivity of the economy’s responses to different configurations of the relationship between public and private consumption, under normal conditions or uncertainty shocks. The findings suggest that, when the economy is hit by a simultaneous shock of uncertainty and public consumption, it obscures the effectiveness of the fiscal stimulus on the economy, corroborating the empirical results.info:eu-repo/semantics/publishedVersio

Uncertainty and the effectiveness of fiscal policy in the United States and Brazil : SVAR approach

This paper analyses the harmful interference of uncertainty on the effectiveness of fiscal policy. We investigate this issue through the lens of a Structural Vector Auto Regressive (SVAR) model for the United States and Brazil. Imposing government spending shocks, we find a positive effect on economic activity. The results suggest Keynesian effects on consumption and GDP. To assess the effects of uncertainty, we used the Economic Policy Uncertainty Index (EPU) and the World Uncertainty Index (WUI). Our findings indicate that the fiscal effects are considerably less intense when uncertainty reaches high levels, consistently with the Real Options approach. The results suggest that agents are more cautious when the high uncertainty overshadows the outline of the economic scenario. In this sense, uncertainty disturbs agents’ decisions and decreases consumption, investment and economic activity.info:eu-repo/semantics/publishedVersio

Citizens' confidence in government and inefficient public spending : is there a trust trap?

The concept of trust is present in the most different areas of scientific knowledge. Associated with moral and philosophical perspectives, it influences the reputation of public institutions, and interferes with economic performance and welfare. Thus, trust is a complex interpersonal and organizational concept but closely linked to social capital, greasing the wheels of relationships and interaction between agents and public institutions. This article aims to assess the effects of inefficient/unproductive government spending on public trust and whether there is evidence of a trust trap. To investigate these effects, we use dynamic regression models and the Generalized Method of Moments (GMM) approach for panel models of 43 (2006-2019) and 33 (2006-2017) developed and developing countries. To further the investigation, we run panel vector autoregression (PVAR) models with the largest sample (43 countries). Our paper focuses on the response of trust in government to the effect of inefficient public spending and income inequality (GINI index). Moreover, we investigate whether the government's high level of inefficiency interferes with this relationship and whether there is evidence of a trust trap. The findings point to significant adverse effects of inefficient public spending on public trust, providing empirical support, and confirming the assumptions of some theoretical works. Our models indicate a threshold in the relationship between trust and inefficient government spending, that is, a trust trap. In short, to a certain extent, it is possible to regain trust by reducing the inefficiency of public spending. However, after this threshold, the recovery of trust requires a greater effort on the part of governments.info:eu-repo/semantics/publishedVersio

Is public investment in construction and in R&D, growth enhancing? A PVAR Approach

We study the impacts of public investment, notably in construction and in R&D on economic growth and of crowding-out effects on private investment. For this purpose, we use Panel Vector Autoregression (PVAR) models and the Generalised Method of Moments (GMM) approach for 40 advanced and emerging countries from 1995 to 2019. Our findings are as follows: i) innovations in public investment have more positive effects on GDP growth and private investment in emerging economies; ii) the positive impulse of public investment on private sector is pronounced and significant in emerging economies; iii) government construction investment has a more positive effect on economic growth in emerging economies; iv) innovations in public construction crowd-out private investment spending in advanced countries; v) emerging economies benefit from public R&D investment; vi) the public investment multiplier of the full sample is 1.67, while it is 0.87 for advanced economies and 2.29 for emerging economies.info:eu-repo/semantics/publishedVersio

Consumption patterns of indebted households : unravelling the relevance of fiscal policy

We have investigated the influence of fiscal instruments, notably taxes on income and government spending, on household consumption in two different samples and two measures of household debt to provide a comprehensive analysis of the topic. We used dynamic panel models and the GMM approach for 32 advanced and emerging countries from 1995 to 2019. Our findings suggest that fiscal impulses increase private consumption, but when households are highly indebted, patterns change, and increased government spending or reduced taxes, in the presence of high indebtedness, actually discourage household consumption compared to the baseline (lower debt) group.info:eu-repo/semantics/publishedVersio

Corruption and economic growth : does the size of the government matter?

Corruption is often a source of contentious debate, covering different areas of knowledge, such as philosophy and sociology. In this paper we assess the effects of corruption on economic activity and highlight the relevance of the size of the government. We use dynamic models and the Generalized Method of Moments (GMM) approach for a panel of 48 countries, from 2012 to 2019. We find an adverse effect of corruption on the level and growth of GDP per capita, but that large governments benefit less from reducing corruption. Furthermore, developing economies, regardless of government size, benefit less from reducing corruption, while government size is not sufficient to explain the influence of corruption on economic activity, although the level of effectiveness of public services is crucial. Finally, our findings suggest that private investment is a potential transmission channel for corruption.info:eu-repo/semantics/publishedVersio

Decisões financeiras à luz da economia comportamental: estudo comparativo dos alunos dos cursos de Economia e Administração de uma universidade federal brasileira

In this article, the seminal study of Kahneman and Tversky (1979) called “prospective theory” is being replicated with the objective of understanding how the students who are finishing their undergraduate studies in Economy and Administration at a federal Brazilian university make financial decisions under uncertain and risk-taking conditions. Behavioral finances are a recent area of finances based on prospective theory, whose objective is to explain “irrational” decisions from the investors caused by emotional factors that modern financial theory sometimes is not able to solve. Through a field research, a 27-question survey was evaluated to assess decision making under different conditions. The analysis of the results was carried out by comparing the results from the current survey with the seminal survey. The results confirm the existence of the effects proposed in the prospective theory, as well as the interference of cognitive biases. It was also concluded that the students at the end of the courses make biased decisions independently from having a higher level of education.En este artículo, se ha buscado replicar el estudio seminal de Kahneman y Tversky (1979), llamado “teoría prospectiva”, con el objetivo de comprender cómo los estudiantes que están finalizando el pregrado en Economía y Administración en una universidad federal brasileña toman decisiones financieras en condiciones de riesgo e incertidumbre. Las finanzas conductuales son un área reciente de las finanzas, basada en la teoría prospectiva, que tiene como objetivo explicar las decisiones "irracionales" de los inversores causadas por factores emocionales que la teoría financiera moderna a veces es incapaz de resolver. A través de una investigación de campo, se evaluó una encuesta con 27 preguntas para evaluar la toma de decisiones en diferentes condiciones. El análisis de los resultados se realizó comparando los resultados de la encuesta actual con la encuesta seminal. Los resultados corroboran la existencia de los efectos propuestos en la teoría prospectiva, así como la interferencia de sesgos cognitivos. También se concluyó que los estudiantes al final de los cursos toman decisiones sesgadas independientemente de que tengan un nivel educativo superior.Neste artigo, buscou-se replicar o estudo seminal de Kahneman e Tversky (1979), denominado “teoria do prospecto”, a fim de entender como os alunos que estão concluindo os cursos de Economia e de Administração de uma universidade federal brasileira tomam decisões financeiras em condições de risco e incerteza. As finanças comportamentais são uma área recente das finanças, cuja base é a teoria do prospecto, a qual objetiva explicar decisões “irracionais” dos investidores causadas por fatores emocionais que a moderna teoria de finanças, por vezes, não é capaz de resolver. Por meio de uma pesquisa de campo, avaliou-se um inquérito com 27 questões para aferir a tomada de decisão em diferentes condições. A análise dos resultados foi conduzida comparando os resultados da atual pesquisa com a pesquisa seminal. Os resultados corroboram a existência dos efeitos propostos na teoria do prospecto, bem como a interferência dos vieses cognitivos. Concluiu-se ainda que os alunos ao final dos cursos tomam decisões enviesadas independentemente de contarem com maior grau de instrução

Uncertainty, corruption, trust in government and the effectiveness of government spending

Doutoramento em EconomiaSince the Great Recession (2007 - 2009) and especially during the Coronavirus pandemic (2020 – 2022), there has been a growing interest in the effects of fiscal policy to drive economies towards sustainable growth. In this sense, fiscal policy can provide the instruments to correct market failures and influence the trajectory of economic activity. However, there is no consensus among scholars and policy-makers on the topic or the (in)effectiveness of the instruments. Nevertheless, it is possible to point out some causes for the imprecision of fiscal effects, such as uncertainty and distrust in national institutions. Briefly, two strands of economic thought guide the conduct of fiscal policies. The first strand claims that the economy must be guided by market self-regulation for effective development. On the other hand, the second group advocates that the government must intervene and regulate economic relations. Between the Great Depression (1929 - 1939) and the beginning of World War II (1939 – 1945), the second group stood out on the governments' agenda and the orientation was of fiscal stimulus to boost employment and smoothen the business cycle. This orientation stood out until the mid-1960s with the rise of monetarism, driven by the Chicago School. Thus, criticisms arose about the effectiveness of fiscal instruments, as they would be incapable of producing short-term effects and, therefore, would not compete with the speed of monetary stimulus, owing to long internal lags for fiscal changes and long external lags for implementing government investment. However, at the beginning of the 21st century, some economists argued that the discredited fiscal policy was back. They underline that, in the light of more conventional theory or historical evidence, monetary policy is efficient in containing high inflation, however, it has limitations in scenarios of high uncertainty, recession and low inflation rates. In this context, this thesis focuses on the macroeconomic impact of public spending in uncertainty scenarios, the influence of trust in government, and corruption on economic performance. The thesis addresses four main questions: what is the effect of public spending on economic activity in times of high and low uncertainty? What is the impact of corruption on economic performance? Is this effect smaller in governments with less interference in the economy (small governments)? How does the quality of public expenditure management affect the citizens' trust and economic activity? The second chapter investigates the influence of uncertainty on the effectiveness of government spending for the United States (U.S.) and Brazil. The findings suggest a positive impact of public spending on economic activity, indicating Keynesian effects on consumption and Gross Domestic Product (GDP). In order to assess the effects of uncertainty, two uncertainty proxies are used, i.e., the Economic Policy Uncertainty Index (EPU) and the World Uncertainty Index (WUI). The models indicate that fiscal effects are considerably less intense when uncertainty reaches high levels. Therefore, agents are more cautious when uncertainty obscures the outline of the economic scenario, hindering agents' decisions, reducing consumption, investment and economic activity, in line with the Real Options (R.O.) approach. The third chapter deepens the analysis of the relationship between uncertainty and economic activity. In this sense, another uncertainty index is used: the market expectation of volatility by stock index option prices (Chicago Board Options Exchange Volatility Index - VIX index). This chapter addresses three main issues: First, the chapter assesses the impact of public consumption shocks on the economy. Next, the chapter analyses the interference of uncertainty shocks on economic activity. Lastly, it investigates the extent to which uncertainty shocks attenuate the economic effect of increasing public consumption. To examine these issues, the essay is divided into two parts. Initially, empirical models are used for the U.S., Brazil and a panel with six European countries. The chapter then highlights a dynamic stochastic general equilibrium (DSGE) model. Lastly, the empirical and theoretical simulations are superimposed, and the adherence of the theoretical model to the data is analysed. The findings suggest that when the economy is hit by a simultaneous shock of uncertainty and public consumption, it obscures the effectiveness of the fiscal stimulus on the economy, corroborating the empirical results. After analysing the interaction of uncertainty with public spending and GDP, chapter four evaluates a second transmission channel. The models examine whether the level of corruption associated with countries with high public spending (big governments) affects GDP. Thus, dynamic models and the Generalised Method of Moments (GMM) approach are used for a panel of 48 countries. The findings point to a significant adverse effect of corruption on GDP per capita (level and growth), but big governments benefit less from reducing corruption. Furthermore, developing economies benefit less from reducing corruption regardless of government size. Thus, the government size is not sufficient to explain the influence of corruption on economic activity, although the level of effectiveness of public services is crucial. Lastly, the models suggest that private investment is a potential transmission channel for corruption. Corruption and trust are complex aspects of interpersonal and organisational relationships, greasing the wheels of relationships between agents and public institutions. Thus, chapter five is organised into two main parts. The first one assesses the effects of ineffective government spending on public trust and whether there is evidence of a trust trap. Lastly, the essay analyses how public trust affects economic activity. This essay employs dynamic regression models and the GMM for panel models. The findings point to a significant adverse impact of ineffective government spending (IGS) on trust in government (TIG), confirming theoretical assumptions. The models also highlight a threshold in the relationship between trust and IGS, i.e., a trust trap. Briefly, to a certain extent, it is possible to regain trust by reducing the ineffectiveness of government spending. However, after this threshold, the recovery of trust requires a significant effort from governments. Lastly, the models suggest that increases in TIG foster economic activity. Therefore, this thesis indicates that in highly unpredictable economies or where there is little TIG from citizens, regardless of the increase in government spending, the responses of households and entrepreneurs are compromised and hence there is no stimulus for investments or private consumption. In this context, the findings suggest that fiscal impulses positively influence household consumption and economic performance. Nevertheless, for a more effective impact of fiscal instruments, it is necessary to develop attitudes and coordinated public policies that inhibit the noxious effects of uncertainty and mistrust indicated through the different transmission channels.Desde a crise financeira (2007/2008) e especialmente durante a pandemia do Coronavírus, tem havido um interesse crescente nos efeitos da política orçamental para impulsionar as economias em direção ao crescimento sustentável. Nesse sentido, a política orçamental pode fornecer os instrumentos para corrigir as falhas de mercado e influenciar a trajetória da atividade económica. No entanto, não há um consenso entre os estudiosos e formuladores de políticas sobre o tema ou sobre a (in)eficácia dos instrumentos. Ainda assim, é possível apontar algumas causas para a imprecisão dos efeitos fiscais, como a incerteza e a desconfiança nas instituições nacionais. Resumidamente, duas linhas de pensamento económico orientam a condução da política orçamental. A primeira vertente defende que a economia deve ser guiada pela autorregulação do mercado para um desenvolvimento efetivo. Por outro lado, o segundo grupo advoga que o governo deve intervir e regular as relações económicas. Após a Grande Depressão (1930) e o início da Segunda Guerra Mundial, o segundo grupo destacou-se na agenda dos governos nacionais e a orientação foi de estímulo fiscal para impulsionar o emprego e atenuar o ciclo económico. Essa orientação destacou-seaté meados da década de 1960, com a ascensão do monetarismo, impulsionado pela Escola de Chicago. Assim, surgiram críticas acerca da eficácia dos instrumentos fiscais, pois seriam incapazes de produzir efeitos de curto prazo e, portanto, não competiriam com a velocidade do estímulo monetário, devido a longas defasagens internas para alterações fiscais e longas defasagens externas para a implementação do investimento do governo. No entanto, no início do século XXI, alguns economistas argumentaram que a desacreditada política orçamental estava de volta. Eles ressaltam que, à luz da teoria mais convencional ou das evidências históricas, a política monetária é eficiente na contenção da inflação elevada, porém apresenta limitações em cenários de alta incerteza, recessão e baixas taxas de inflação. Nesse contexto, esta tese tem como enfoque o impacto macroeconómico do gasto público em cenários de incerteza, a influência da confiança no governo e da corrupção no desempenho económico. Portanto, a tese aborda quatro questões principais: qual é o efeito do gasto público na atividade económica em tempos de alta e baixa incerteza? Qual é o impacto da corrupção no desempenho económico? Esse efeito é menos intenso em governos com menor interferência na economia (governos pequenos)? Como a qualidade da gestão do gasto público afeta a confiança dos cidadãos e a atividade económica? O segundo capítulo investiga a influência da incerteza na eficácia dos gastos governamentais para os Estados Unidos e o Brasil. Os resultados sugerem um impacto positivo do gasto público sobre a atividade económica, indicando efeitos keynesianos sobre o consumo e o Produto Interno Bruto (PIB). Para avaliar os efeitos da incerteza, duas proxies de incerteza são usadas, ou seja, o Índice de Incerteza de Política Económica e o Índice de Incerteza Mundial. Os modelos indicam que os efeitos fiscais são consideravelmente menos intensos quando a incerteza atinge níveis elevados. Portanto, os agentes são mais cautelosos quando a incerteza obscurece o contorno do cenário económico, dificultando as decisões dos agentes, reduzindo o consumo, o investimento e a atividade económica, em linha com a abordagem das Opções Reais. O terceiro capítulo aprofunda a análise da relação entre incerteza e atividade económica. Nesse sentido, outro índice de incerteza é utilizado: a expectativa de mercado da volatilidade dos preços das opções de índices de ações (Chicago Board Options Exchange Volatility Index - índice VIX). Este capítulo aborda três questões principais: inicialmente, o ensaio avalia o impacto dos choques de consumo público na economia. Em seguida, o capítulo analisa a interferência de choques de incerteza sobre a atividade económica. Por fim, o capítulo investiga até que ponto os choques de incerteza atenuam o efeito económico do aumento do consumo público. Para examinar essas questões, o ensaio está dividido em duas partes. Inicialmente, são utilizados modelos empíricos para os EUA, Brasil e um painel com seis países europeus. O capítulo então destaca um modelo de equilíbrio geral estocástico dinâmico. Finalmente, são comparadas as simulações (empíricas e teóricas) e analisada a aderência do modelo teórico aos dados. Os resultados sugerem que quando a economia é atingida por um choque simultâneo de incerteza e consumo público, isso obscurece a eficácia do estímulo fiscal sobre a economia, corroborando os resultados empíricos. Depois de analisar a interação da incerteza com os gastos públicos e o PIB, o capítulo quatro avalia um segundo canal de transmissão. O ensaio examina se o nível de corrupção associado a países com altos gastos públicos (governos grandes) afeta o PIB. Assim, modelos dinâmicos e a abordagem Generalised Method of Moments (GMM) são usados para um painel de 48 países. Os resultados apontam para um efeito adverso significativo da corrupção sobre o PIB per capita (nível e crescimento), mas os grandes governos se beneficiam menos da redução da corrupção. Além disso, as economias em desenvolvimento se beneficiam menos da redução da corrupção, independentemente do tamanho do governo. Desta forma, o tamanho do governo não é suficiente para explicar a influência da corrupção na atividade económica, embora o nível de eficácia dos serviços públicos seja crucial. Por último, os modelos sugerem que o investimento privado é um potencial canal de transmissão da corrupção. A corrupção e a confiança são aspectos complexos das relações interpessoais e organizacionais, lubrificando as rodas das relações entre agentes e instituições públicas. Assim, o capítulo cinco está organizado em duas partes principais. A primeira avalia os efeitos de gastos governamentais ineficazes na confiança pública e se há evidências de uma armadilha de confiança. Por fim, o ensaio analisa como a confiança pública afeta a atividade económica. Este ensaio utiliza modelos de regressão dinâmica e o GMM para modelos em painel. Os resultados apontam para um significativo impacto adverso dos gastos governamentais ineficazes sobre a confiança no governo, confirmando os pressupostos teóricos. Os modelos também destacam um limiar na relação entre confiança e gastos governamentais ineficazes, ou seja, uma armadilha de confiança. Resumidamente, até certo ponto, é possível recuperar a confiança reduzindo a ineficácia dos gastos do governo. No entanto, após esse limiar, a recuperação da confiança exige um esforço significativo dos governos. Por fim, os modelos sugerem que aumentos na confiança no governo estimulam a atividade económica. Portanto, esta tese indica que em economias altamente imprevisíveis ou onde há pouca confiança dos cidadãos no governo, independentemente do aumento dos gastos do governo, as respostas das famílias e dos empresários ficam comprometidas e, portanto, não há estímulo para investimentos ou consumo privado. Nesse contexto, os resultados sugerem que os impulsos fiscais influenciam positivamente o consumo das famílias e o desempenho económico. No entanto, para um impacto mais efetivo dos instrumentos fiscais, é necessário desenvolver atitudes e políticas públicas coordenadas que inibam os efeitos nocivos da incerteza e desconfiança indicados pelos diferentes canais de transmissão.info:eu-repo/semantics/publishedVersio

Consumption Patterns of Indebted Households: Unravelling the Relevance of Fiscal Policy

We have investigated the influence of fiscal instruments, notably taxes on income and government spending, on household consumption in two different samples and two measures of household debt to provide a comprehensive analysis of the topic. We used dynamic panel models and the GMM approach for 32 advanced and emerging countries from 1995 to 2019. Our findings suggest that fiscal impulses increase private consumption, but when households are highly indebted, patterns change, and increased government spending or reduced taxes, in the presence of high indebtedness, actually discourage household consumption compared to the baseline (lower debt) group

Decisões financeiras à luz da economia comportamental: estudo comparativo dos alunos dos cursos de Economia e Administração de uma universidade federal brasileira

In this article, the seminal study of Kahneman and Tversky (1979) called “prospective theory” is being replicated with the objective of understanding how the students who are finishing their undergraduate studies in Economy and Administration at a federal Brazilian university make financial decisions under uncertain and risk-taking conditions. Behavioral finances are a recent area of finances based on prospective theory, whose objective is to explain “irrational” decisions from the investors caused by emotional factors that modern financial theory sometimes is not able to solve. Through a field research, a 27-question survey was evaluated to assess decision making under different conditions. The analysis of the results was carried out by comparing the results from the current survey with the seminal survey. The results confirm the existence of the effects proposed in the prospective theory, as well as the interference of cognitive biases. It was also concluded that the students at the end of the courses make biased decisions independently from having a higher level of education.En este artículo, se ha buscado replicar el estudio seminal de Kahneman y Tversky (1979), llamado “teoría prospectiva”, con el objetivo de comprender cómo los estudiantes que están finalizando el pregrado en Economía y Administración en una universidad federal brasileña toman decisiones financieras en condiciones de riesgo e incertidumbre. Las finanzas conductuales son un área reciente de las finanzas, basada en la teoría prospectiva, que tiene como objetivo explicar las decisiones "irracionales" de los inversores causadas por factores emocionales que la teoría financiera moderna a veces es incapaz de resolver. A través de una investigación de campo, se evaluó una encuesta con 27 preguntas para evaluar la toma de decisiones en diferentes condiciones. El análisis de los resultados se realizó comparando los resultados de la encuesta actual con la encuesta seminal. Los resultados corroboran la existencia de los efectos propuestos en la teoría prospectiva, así como la interferencia de sesgos cognitivos. También se concluyó que los estudiantes al final de los cursos toman decisiones sesgadas independientemente de que tengan un nivel educativo superior.Neste artigo, buscou-se replicar o estudo seminal de Kahneman e Tversky (1979), denominado “teoria do prospecto”, a fim de entender como os alunos que estão concluindo os cursos de Economia e de Administração de uma universidade federal brasileira tomam decisões financeiras em condições de risco e incerteza. As finanças comportamentais são uma área recente das finanças, cuja base é a teoria do prospecto, a qual objetiva explicar decisões “irracionais” dos investidores causadas por fatores emocionais que a moderna teoria de finanças, por vezes, não é capaz de resolver. Por meio de uma pesquisa de campo, avaliou-se um inquérito com 27 questões para aferir a tomada de decisão em diferentes condições. A análise dos resultados foi conduzida comparando os resultados da atual pesquisa com a pesquisa seminal. Os resultados corroboram a existência dos efeitos propostos na teoria do prospecto, bem como a interferência dos vieses cognitivos. Concluiu-se ainda que os alunos ao final dos cursos tomam decisões enviesadas independentemente de contarem com maior grau de instrução