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Macroeconomic Effects From Government Purchases and Taxes

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  • Robert J. Barro
  • Charles J. Redlick

Abstract

For U.S. annual data that include World War II, the estimated multiplier for temporary defense spending is 0.4--0.5 contemporaneously and 0.6--0.7 over 2 years. If the change in defense spending is "permanent" (gauged by Ramey's defense news variable), the multipliers are higher by 0.1--0.2. Since all estimated multipliers are significantly less than 1, greater spending crowds out other components of GDP, particularly investment. The lack of good instruments prevents estimation of reliable multipliers for nondefense purchases; multipliers in the literature of two or more likely reflect reverse causation from GDP to nondefense purchases. Increases in average marginal income tax rates (measured by a newly constructed time series) have significantly negative effects on GDP. When interpreted as a tax multiplier, the magnitude is around 1.1. The combination of the estimated spending and tax multipliers implies that the balanced-budget multiplier for defense spending is negative. We have some evidence that tax changes affect GDP mainly through substitution effects, rather than wealth effects. Copyright 2011, Oxford University Press.

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Article provided by Oxford University Press in its journal The Quarterly Journal of Economics.

Volume (Year): 126 (2011)
Issue (Month): 1 ()
Pages: 51-102

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Handle: RePEc:oup:qjecon:v:126:y:2011:i:1:p:51-102

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  1. Monetary or fiscal stimulus can help only if unemployment is cyclical; otherwise, if unemployment is structural expansionary policies will lead only to inflation. Careful recent analyses indicate that unemployment is mainly cyclical in the US
    by Blog Admin in British Politics and Policy at LSE on 2012-10-24 16:00:33
  2. Given the enormity of the short- and long-run fiscal challenges facing the US, the lack of policy detail from both presidential candidates is disappointing
    by Blog Admin in British Politics and Policy at LSE on 2012-10-25 13:00:36
  3. Must be right- Krugman says it!
    by paragwaknis in Musings of the Sorts on 2013-04-20 17:15:34
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