Column (6) of Table 18 shows that in all countries except Australia, the change in the
variance of the government spending shock has contributed to the fall in the variance of
the four-quarter-ahead forecast error in GDP, by up to 25 percent in the UK. Column (7)
shows that changes in the transmission mechanism of government spending have made an
even larger contribution to the decline in the variance of GDP in all countries except in
Germany. Overall, changes in the variance of the government spending shock and of its
transmission mechanism contribute to about 30 percent of the decrease in the variance of
the 4 quarter ahead GDP forecast error in the US, 12 percent in Germany, and 80 percent
in the UK; a large decline also occurs in Canada, where however the variance of the 4
quarter ahead GDP forecast error increases.
In the first three countries, changes in the variance of the tax shock (column (8)) also
contribute to the decline in the variance of GDP, in two cases by even larger amounts than
government spending shocks; the contribution of changes in the transmission mechanism
of taxation (column (9)) is mixed.