Fiscal policy in the Bundestag: Textual analysis and macroeconomic effects

Fiscal policy is made in parliaments. We go to the roots of changes of fiscal policy in Germany and use a novel data set on all parliamentary speeches in the Bundestag from 1960 to 2021. We propose an embedding-based approach, which allows the representation of words and documents in a shared vector space, in order to measure fiscal policy-related sentiment in parliamentary debates at a scale from contractionary to expansionary. We also distinguish between sentiment related to exogenous and endogenous fiscal policy. We put fiscal sentiment into a series of recursively-identified vector autoregressive models to show that a change in fiscal sentiment causes a shift in government spending and has significant effects on the macroeconomy. The results support the notion that the debate in parliament contains information for the identification of government spending shocks.