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The Fiscal Multiplier Morass: A Bayesian Perspective

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  • Todd B. Walker

    (Indiana University)

  • Nora Traum

    (North Carolina State University)

  • Eric M. Leeper

    (Indiana University)

Abstract

A Bayesian prior predictive analysis is conducted on a suite of models to assess the probability that a model and corresponding prior distributions bias results toward a specific range of fiscal multipliers. We examine a wide range of DSGE models commonly used to estimate fiscal multipliers, including a real business cycle model, a New Keynesian model with nominal and real rigidities, and open economy models. We decompose changes in multipliers across models into wealth and substitution effects, allowing for a more uniform comparison across models. Through the prior predictive analysis, we show that many of the models and prior distributions impose a very tight range for the multiplier before the models are taken to data. We argue that constraining the multiplier to such a tight range prior to conditioning on data is tantamount to biasing results. A broader message of the paper calls for employing prior predictive analysis when estimating DSGE models.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 583.

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Date of creation: 2011
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Handle: RePEc:red:sed011:583

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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Cited by:
  1. Thorsten Drautzburg & Harald Uhlig, 2011. "Fiscal Stimulus and Distortionary Taxation," NBER Working Papers 17111, National Bureau of Economic Research, Inc.
  2. Werner Roeger & Robert Kollmann & Marco Ratto & Jan in 't Veld, 2012. "Estimating the Effects of Standard Fiscal and Bank Rescue Measures," 2012 Meeting Papers, Society for Economic Dynamics 764, Society for Economic Dynamics.
  3. Robert Kollmann & Marco Ratto & Werner Roeger & Jan in'tVeld, 2012. "Fiscal Policy, Banks and the Financial Crisis," Working Papers ECARES, ULB -- Universite Libre de Bruxelles ECARES 2012-034, ULB -- Universite Libre de Bruxelles.
  4. Kollmann, Robert & Roeger, Werner & Veld, Jan in't, 2012. "Fiscal Policy in a Financial Crisis: Standard Policy vs. Bank Rescue Measures," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8829, C.E.P.R. Discussion Papers.
  5. Matthew Denes & Gauti B. Eggertsson & Sophia Gilbukh, 2013. "Deficits, Public Debt Dynamics and Tax and Spending Multipliers," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 0, pages 133-163, 02.

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