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The Keynesian multiplier, news and fiscal policy rules in a DSGE model

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  • Perendia, George
  • Tsoukis, Chris

Abstract

We extend the standard Smets-Wouters (2007) medium-sized DSGE model in two directions, namely to analyse the effects of news and the Keynesian multiplier, and secondly to incorporate a fiscal policy rule. We show that both the news channel and the government spending fiscal policy rule significantly improve the model fit to data. News shows up significantly, but most of its contribution comes from the fiscal rule as opposed to consumption. We then calculate the fiscal multipliers which appear more Keynesian (with a higher effect on output and a positive effect on consumption, more persistent) than argued in much preceding literature.

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Bibliographic Info

Paper provided by CEPREMAP in its series Dynare Working Papers with number 25.

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Length: 50 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:cpm:dynare:025

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Keywords: DSGE model; news; fiscal policy; Taylor rule; Keynesian multiplier;

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References

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  1. S. Rao Aiyagari & Lawrence J. Christiano & Martin Eichenbaum, 1990. "The output, employment, and interest rate effects of government consumption," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago 90-10, Federal Reserve Bank of Chicago.
  2. John B. Taylor, 2011. "An Empirical Analysis of the Revival of Fiscal Activism in the 2000s," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 49(3), pages 686-702, September.
  3. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, American Economic Association, vol. 75(1), pages 117-27, March.
  4. Michael Woodford, 2010. "Simple Analytics of the Government Expenditure Multiplier," NBER Working Papers 15714, National Bureau of Economic Research, Inc.
  5. Heijdra, Ben J, 1998. "Fiscal Policy Multipliers: The Role of Monopolistic Competition, Scale Economies, and Intertemporal Substitution in Labour Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 659-96, August.
  6. N. Gregory Mankiw, 1987. "Imperfect Competition and the Keynesian Cross," NBER Working Papers 2386, National Bureau of Economic Research, Inc.
  7. Ethan Ilzetzki & Enrique G. Mendoza & Carlos A. Végh, 2010. "How Big (Small?) are Fiscal Multipliers?," NBER Working Papers 16479, National Bureau of Economic Research, Inc.
  8. Cogan, John F. & Cwik, Tobias J. & Taylor, John B. & Wieland, Volker, 2009. "New Keynesian versus old Keynesian government spending multipliers," CFS Working Paper Series, Center for Financial Studies (CFS) 2009/17, Center for Financial Studies (CFS).
  9. Fatás, Antonio & Mihov, Ilian, 1999. "Government Size and Automatic Stabilizers: International and Intranational Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2259, C.E.P.R. Discussion Papers.
  10. Casey B. Mulligan, 2010. "Simple Analytics and Empirics of the Government Spending Multiplier and Other “Keynesian” Paradoxes," NBER Working Papers 15800, National Bureau of Economic Research, Inc.
  11. Heijdra, Ben J & Ligthart, Jenny E & van der Ploeg, Frederick, 1998. "Fiscal Policy, Distortionary Taxation, and Direct Crowding Out under Monopolistic Competition," Oxford Economic Papers, Oxford University Press, vol. 50(1), pages 79-88, January.
  12. Paul Levine & Joseph Pearlman & George Perendia & Bo Yang, 2010. "Endogenous Persistence in an Estimated DSGE Model under Imperfect Information," School of Economics Discussion Papers, School of Economics, University of Surrey 0310, School of Economics, University of Surrey.
  13. Saroj Bhattarai & Jae Won Lee & Woong Yong Park, 2012. "Policy regimes, policy shifts, and U.S. business cycles," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 109, Federal Reserve Bank of Dallas.
  14. Robert E. Hall, 2009. "By How Much Does GDP Rise If the Government Buys More Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 183-249.
  15. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(4), pages 1329-1368, November.
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Cited by:
  1. Paul Beaudry & Franck Portier, 2014. "News Driven Business Cycles: Insights and Challenges," 2014 Meeting Papers, Society for Economic Dynamics 289, Society for Economic Dynamics.

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