Motivation: The recent experience of the Great Recession in the U.S., which was accompanied by great uncertainty in the real economy and financial sector has sparked debate about the effect of uncertainty on macroeconomic outcomes. At the same time, sharp increases in government spending in advanced economies pushed the short-term effects of fiscal policy back on the macroeconomic research agenda. In a model with non-convex adjustment costs in both capital and labor and time-varying uncertainty, Bloom et al. (2018) find that firms become more cautious in investing and hiring as uncertainty increases. This is called the real option channel of uncertainty. Another channel through which uncertainty affects the real economy is called precautionary savings (Bloom 2014), stating that consumers lower their consumption and increase their savings in uncertain times. Hence Leduc and Liu (2016) interpret uncertainty shocks as aggregate demand shocks. So investment and consumption depend on uncertainty. Since the effectiveness of fiscal policy depends strongly on the reaction of private spending (Ramey 2011a), we seek to evaluate the role of uncertainty for the effectiveness of government spending.

Method and Specification: Methodologically, we estimate a structural Self-Exciting Interacted VAR (SEIVAR) as proposed by Pellegrino (2017) with quarterly U.S.-post-WWII data to capture the possible non-linear effect of government spending regarding uncertainty. It augments an otherwise standard VAR with an interaction term including the government spending variable and the uncertainty proxy. In this model the partial effect of government spending on each variable is allowed to depend on the values of uncertainty. We are especially interested in the effects of government spending shocks on the economy in tranquil times and in uncertain times.

One scope of the paper is also to provide some policy implications. Therefore we follow Arcabic and Cover (2016), Auerbach and Gorodnichenko (2012) and consider not only aggregate government spending (consumption + investment) but also components of government spending. In particular, we analyze the effects of government consumption, investment, R & D spending and military defense spending. To account for the effects on private spending, we also check for the effects on private consumption and private gross investment.