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

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  • Fève, Patrick
  • Matheron, Julien
  • Sahuc, Jean-Guillaume

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 crossequation 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 Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 708.

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Date of creation: Apr 2012
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Publication status: Published in American Economic Journal: Macroeconomics, vol.�5, n°4, octobre 2013, p.�141-178.
Handle: RePEc:ide:wpaper:25756

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

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Citations

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. Hashmat Khan & Abeer Reza, 2013. "House Prices, Consumption, and Government Spending Shocks," Carleton Economic Papers 13-10, Carleton University, Department of Economics.
  3. 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.
  4. Fève, Patrick & Sahuc, Jean-Guillaume, 2013. "On the Size of the Government Spending Multiplier in the Euro Area," TSE Working Papers 13-396, Toulouse School of Economics (TSE), revised Nov 2013.

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