Response to fiscal policy shocks can impact debt expectations: ECB paper

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A European Central Bank paper, published on July 12, says fiscal shocks not accompanied by an expected spending reversal cause an increase in the public debt burden and a decrease in confidence, which depresses real activity.

Jacopo Cimadomo, Sebastian Hauptmeier and Sergio Sola, the paper's authors, use time-series data in the US to measure exogenous spending and how expectations about future government spending affect the transmission of fiscal policy shocks. The authors distinguish between

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