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A Pitfall with DSGE-Based, Estimated, Government Spending Multipliers

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  • Fève, P.
  • Matheron, J.
  • Sahuc, J.G.

Abstract

This paper examines issues related to the estimation of the government spending multiplier (GSM) in a Dynamic Stochastic General Equilibrium context. We stress a potential source of bias in the GSM arising from the combination of Edgeworth complementarity/substitutability between private consumption and government expenditures and endogenous 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 prove to be robust to a number of perturbations.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 379.

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Length: 59 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:bfr:banfra:379

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Keywords: DSGE models; Edgeworth complementarity/substitutability; Government spending rules; Multiplier.;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Are multipliers larger than we thought?
    by Economic Logician in Economic Logic on 2012-05-08 14:56:00
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Cited by:
  1. Marcello M. Estevão & Issouf Samaké, 2013. "The Economic Effects of Fiscal Consolidation with Debt Feedback," IMF Working Papers 13/136, International Monetary Fund.
  2. 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.
  3. 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.
  4. repec:car:carecp:13-10 is not listed on IDEAS

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