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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, 2013.
Handle: RePEc:ide:wpaper:25756

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

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  1. Fiorito, Riccardo & Kollintzas, Tryphon, 2002. "Public Goods, Merit Goods, and the Relation Between Private and Government Consumption," CEPR Discussion Papers 3617, C.E.P.R. Discussion Papers.
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  17. Dupaigne, Martial & Fève, Patrick & Matheron, Julien, 2007. "Avoiding Pitfalls in Using Structural VARs to Estimate Economic Models," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
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  19. Sarah Zubairy, 2010. "On Fiscal Multipliers: Estimates from a Medium Scale DSGE Model," Working Papers 10-30, Bank of Canada.
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  1. Are multipliers larger than we thought?
    by Economic Logician in Economic Logic on 2012-05-08 14:56:00

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