Anticipation Effects and Fiscal Multipliers: Evidence from WWII
Abhi Gupta and Jianlin Wang
Abstract
Correctly estimating fiscal multipliers depends on correctly recording when news of future spending breaks. The leading approach from Ramey (2011) deals with this issue by constructing fiscal shocks using news articles on defense spending. As an alternative, we construct a new measure of excess returns on military contractors over 1936-1947. Excess returns systematically lead the defense news series and produce more persistent dynamic responses of output and government spending. We estimate a long-run fiscal multiplier of 0.7. We consider two explanations for these discrepancies in the context of WWII: slow-moving changes in public expectations and private, pre-war coordination between defense-related firms and the government. For the first, we show that controlling for prewar expectations of future spending renders both the news series and excess returns poor predictors of government spending. For the second, lagging (leading) the excess returns (defense news) series can approximately reproduce the impulse responses generated by the other, suggesting that firms’ returns are measuring the same eventual spending as the defense news series but are responding earlier in time.