Expected Impact of Fiscal Expenditure—Identification from Financial Markets

Do the public's expectations of fiscal policy have important macroeconomic effects? To investigate this problem, this paper analyzes the impact of fiscal expenditure expectation on macroeconomic dynamics and SVAR setting at first; then, based on the characteristics of China's fiscal policy and stock market, construct an expectation variable that is in line with the practice of fiscal policy; finally, identify the shock of expected fiscal expenditure and the shock of unexpected fiscal expenditure in the SVAR model augmented the expectation variable. We find (1) the expectation variable constructed based on the quarterly simple excess return of SSE 180 infrastructure index is a good predictor for government investment expenditure and total fiscal expenditure; the impact of fiscal expenditure expectation can produce obvious stimulus effect. (2) the SVAR model without the expectation variables will overestimate impulse responses of main macroeconomic variables to varying degrees. (3) the multiplier of unexpected government investment is not obvious bigger than the one of government consumption. The main marginal contribution of this paper is to construct a proxy variable of fiscal expenditure expectation being suitable for Chinese data.