A Pitfall with Estimated DSGE-Based Government Spending Multipliers

Patrick Fève · Julien Matheron · Jean-Guillaume Sahuc

60 citations0/0 files storedAmerican Economic Journal Macroeconomics

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Monetary Policy and Economic Impact Fiscal Policies and Political Economy Fiscal Policy and Economic Growth

Abstract

This paper examines issues related to the estimation of the government spending multiplier (GSM) in a DSGE context. We stress a source of bias in the GSM arising from the combination of endogenous government expenditures and Edgeworth complementarity between private consumption and government expenditures. Due to cross-equation restrictions, omitting the endogenous component of government policy at the estimation stage would lead an econometrician to underestimate the degree of Edgeworth complementarity and, consequently, the long-run GSM. An estimated version of our model with US postwar data shows that this bias matters quantitatively. The results are robust to a number of perturbations. (JEL E13, E23, E32, E62, H50)

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References

2005Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy 2007Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach 2002An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output 2007Understanding the Effects of Government Spending on Consumption 1999An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output 2011When Is the Government Spending Multiplier Large?1990Fiscal Policy in General Equilibrium 2003Estimating the Effects of Fiscal Policy in OECD Countries

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