Seminar The sentiment channel of fiscal policy Add to calendar 2026-02-03 11:00 2026-02-03 12:15 Europe/Rome The sentiment channel of fiscal policy Conference Room Villa La Fonte YYYY-MM-DD Print Share: Share on Facebook Share on BlueSky Share on X Share on LinkedIn Send by email Scheduled dates Feb 03 2026 11:00 - 12:15 CET Conference Room, Villa La Fonte Organised by Department of Economics This event features a presentation by Adrien Couturier (London School of Economics). How does government spending stimulate the economy? We uncover a new transmission channel---the sentiment channel---by showing that government spending makes firms overoptimistic about their future demand, thereby stimulating investment and output. We assemble a novel dataset linking microdata on Italian firms' sales, sales forecasts, and public procurement contracts. Using a natural experiment that shifted public spending across municipalities, we find that an increase in government demand makes firms systematically overoptimistic about their future sales. This overoptimism is pervasive, as firms also raise their expectations about export sales. To interpret these findings, we develop a theory of expectations in which shocks to total sales make a firm overoptimistic about both its public and private sales. We embed this model of expectations in a heterogeneous-firm New Keynesian model disciplined with our causal estimates. Government spending boosts firms optimism which prompts them to invest, crowding-in investment in general equilibrium---thereby doubling the government spending multiplier. This amplification is state-dependent: our model predicts that the multiplier is a third smaller during financial crises than in recessions without financial distress. Register