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New Keynesian versus Old Keynesian Government Spending Multipliers

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Author Info
John F. Cogan () (Stanford University - The Hoover Institution on War, Revolution and Peace, HHMB Rm 347, Stanford, CA 94305, USA.)
Tobias Cwik () (Goethe University Frankfurt, Grüneburgplatz 1, Uni-Pf. 77, D-60323 Frankfurt am Main, Germany.)
John B. Taylor () (Stanford University, Stanford, CA 94305, USA.)
Volker Wieland () (University of Frankfurt, P.O. Box 94, Mertonstrasse 17, D-60054 Frankfurt am Main, Germany.)

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Abstract

Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modelling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically-estimated and widely-cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small with GDP and employment effects only one-sixth as large. JEL Classification: C52, E62.

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Paper provided by European Central Bank in its series Working Paper Series with number 1090.

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Length: 29 pages
Date of creation: Sep 2009
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Handle: RePEc:ecb:ecbwps:20091090

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Related research
Keywords: Fiscal Multiplier; New Keynesian Model; Fiscal Stimulus; Government Spending; Macroeconomic Modeling.;

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  1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2009. "New Keynesian Models: Not Yet Useful for Policy Analysis," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 242-66, January. [Downloadable!]
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  2. Michael Woodford, 2009. "Convergence in Macroeconomics: Elements of the New Synthesis," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 267-79, January. [Downloadable!]
  3. Günter Coenen & Roland Straub, 2005. "Does Government Spending Crowd in Private Consumption? Theory and Empirical Evidence for the Euro Area," International Finance, Blackwell Publishing, vol. 8(3), pages 435-470, December. [Downloadable!] (restricted)
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  4. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April. [Downloadable!] (restricted)
  5. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
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  1. Sylvain Leduc, 2009. "Fighting downturns with fiscal policy," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Jun 19. [Downloadable!]
  2. Alan J. Auerbach & William G. Gale, 2009. "Activist Fiscal Policy to Stabilize Economic Activity," NBER Working Papers 15407, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. James D. Foster, 2009. "Keynesian Policies Stimulate Dabate And Debt, Not Employment," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 10(2), pages 20-25, 07. [Downloadable!]
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This page was last updated on 2009-12-10.

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