Macroeconomic effects of government spending shocks: New narrative evidence from Canada

Abstract

This paper examines the macroeconomic effects of government spending shocks in Canada for the period of 1949–2012. We construct a novel measure of news about exogenous government spending changes identified through the narrative approach. We use government documents, mostly the budget speech, to identify the size, timing, and principal motivation for all planned major federal government spending changes. To achieve identification, we consider those changes that are unrelated to the contemporaneous movements in the economy. The implied government spending multiplier estimates using our exogenous government spending news series are between 1.08 and 1.69.