Signals from the government: Policy disagreement and the transmission of fiscal shocks

• We study how policy communication affects the propagation of fiscal spending shocks.
• We propose a new measure of the coordination effects of fiscal communication.
• With low disagreement, the output response to the shocks is large and positive.
• This is due to the accelerator effect of planned fiscal spending on private investment.
• Conversely, with elevated disagreement the output response is muted.

We investigate the effects of fiscal policy communication on the propagation of government spending shocks. To this aim, we propose a new index measuring the coordination effects of policy communication on private agents׳ expectations. This index is based on the disagreement amongst US professional forecasters about future government spending. The underlying intuition is that a clear fiscal policy communication can coalesce expectations, reducing disagreement. Results indicate that, in times of low disagreement, the output response to fiscal spending innovations is positive and large, mainly due to private investment response. Conversely, periods of elevated disagreement are characterised by muted output response.