More generally, our work joins an open debate in the academic literature on the impact of fiscal shocks on macroeconomic variables, like the exchange rate, inflation rate, consumption and net exports. There are two reasons why this debate has generated so much academic work. First, it is difficult to identify exogenous movements in government spending to assess their causal effect and, second, theoretical intuitions are not aligned with the empirical evidence, generating economic puzzles.
Quotations mine.
The puzzle and answer are in the boldface. Institutions are hedged exactly because they are not cash flow and their future volatility is unknown both to the private investor and the government legislator. The authors then state their results:
By employing this identification technique, most puzzling results dissolve: government spending shocks are inflationary, appreciate the real exchange rate, worsen the trade balance and decrease private consumption (see the Impulse Response Functions in the figure below).
Exactly, government spending generally leads to poorer consumers, mostly an attack on the poorest of the poor. So naturally this is going to be masked, hidden inside the consolidated budget by corrupt government institutions. It is a puzzle no more, we know who is doing it, we know who is lying about it and AOC is going to be pissed if she ever learns to decode this literature. The senator from Arkansas will remain ignorant of the whole problem.
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