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A Pitfall with Estimated DSGE-Based Government Spending Multipliers

  • Patrick F?ve
  • Julien Matheron
  • Jean-Guillaume Sahuc

This paper examines issues related to the estimation of the government spending multiplier (GSM) in a DSGE context. We stress a source of bias in the GSM arising from the combination of endogenous government expenditures and Edgeworth complementarity between private consumption and government expenditures. Due to cross-equation 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 are robust to a number of perturbations.

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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 5 (2013)
Issue (Month): 4 (October)
Pages: 141-78

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Handle: RePEc:aea:aejmac:v:5:y:2013:i:4:p:141-78
Note: DOI: 10.1257/mac.5.4.141
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