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Regime dependence of the fiscal multiplier

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  • Mittnik, Stefan
  • Semmler, Willi

Abstract

After the financial market meltdown of the years 2007–2008 the Obama administration responded with large fiscal stimulus package, yet the reaction to this stimulus has been diverse. Some predicted a multiplier effect in the order of 1.5, others argued that the multiplier will be less than 0.5. Such multiplier estimates typically stem from estimated linear vector autoregressions (VARs) or linearized versions of DSGE models. In this paper, we argue that neither conventional VAR analysis nor linearized DGSE models may be appropriate to evaluate demand effects arising from such a stimulus package. The reason is, as recent research suggests, that the timing of demand shocks matters. To assess the multiplier's variability, we adopt a regime-dependent VAR approach. As is shown in detail, our model specification is grounded on theoretical considerations. The empirical analysis presented here suggests that a regime-dependent VAR-specification is favored for U.S. output and employment data, and that the standard (one-regime) VAR methodology is inappropriate for analyzing multi-regime processes. Although we employ a nonlinear VAR framework, the chosen setup allows the use of largely familiar macroeconometric modeling tools. Estimating a two-regime VAR, we show that the fiscal multiplier varies with the state of the business cycle and the particular specifics of the measure taken. For the U.S. we find, for example, the fiscal expansion multiplier is much higher in a regime of a low economic activity than in a regime of high activity. As we also show it is size dependent.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 83 (2012)
Issue (Month): 3 ()
Pages: 502-522

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Handle: RePEc:eee:jeborg:v:83:y:2012:i:3:p:502-522

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Web page: http://www.elsevier.com/locate/jebo

Related research

Keywords: Fiscal multiplier; Regime switching model; Regimedependent multiplier; Multi-regime VAR (MRVAR);

References

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Citations

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Cited by:
  1. Proaño, Christian R. & Schoder, Christian & Semmler, Willi, 2014. "Financial stress, sovereign debt and economic activity in industrialized countries: Evidence from dynamic threshold regressions," Journal of International Money and Finance, Elsevier, vol. 45(C), pages 17-37.
  2. Schleer, Frauke & Semmler, Willi, 2014. "Financial sector-output dynamics in the euro area: Non-linearities reconsidered," ZEW Discussion Papers 13-068 [rev.], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Steven M. Fazzari & James Morley & Irina Panovska, 2012. "State-Dependent Effects of Fiscal Policy," INET Research Notes 3, Institute for New Economic Thinking (INET).
  4. Gustav A. Horn & Sebastian Gechert & Katja Rietzler & Kai D. Schmid, 2014. "Streitfall Fiskalpolitik," IMK Report 92-2014, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  5. repec:spo:wpecon:info:hdl:2441/2g7mhju69b94obeaqlen09s1au is not listed on IDEAS
  6. Creel, Jérôme & Hubert, Paul & Saraceno, Francesco, 2013. "An assessment of the Stability and Growth Pact reform in a small-scale macro-framework," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1567-1580.
  7. Stefan Mittnik & Willi Semmler, 2013. "The Real Consequences of Financial Stress," SFB 649 Discussion Papers SFB649DP2013-011, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  8. Christophe Blot & Marion Cochard & Jérôme Creel & Bruno Ducoudre & Danielle Schweisguth & Xavier Timbeau, 2014. "Fiscal consolidation in times of crisis: is the sooner really the better?," Sciences Po publications info:hdl:2441/2g7mhju69b9, Sciences Po.

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