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A Pitfall with Estimated DSGE-Based Government Spending Multipliers

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  • Patrick F?ve
  • Julien Matheron
  • Jean-Guillaume Sahuc

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.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 5 (2013)
Issue (Month): 4 (October)
Pages: 141-78

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Handle: RePEc:aea:aejmac:v:5:y:2013:i:4:p:141-78

Note: DOI: 10.1257/mac.5.4.141
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Citations

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Cited by:
  1. Hashmat Khan & Abeer Reza, 2013. "House Prices, Consumption, and Government Spending Shocks," Carleton Economic Papers 13-10, Carleton University, Department of Economics.
  2. Marcello M. Estevão & Issouf Samaké, 2013. "The Economic Effects of Fiscal Consolidation with Debt Feedback," IMF Working Papers 13/136, International Monetary Fund.
  3. Iwata, Yasuharu, 2013. "Two fiscal policy puzzles revisited: New evidence and an explanation," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 188-207.
  4. Fève, Patrick & Sahuc, Jean-Guillaume, 2013. "On the Size of the Government Spending Multiplier in the Euro Area," IDEI Working Papers 776, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2013.

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