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Macroeconomic Effects From Government Purchases and Taxes

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  • Robert J. Barro
  • Charles J. Redlick

Abstract

For U.S. annual data that include World War II, the estimated multiplier for temporary defense spending is 0.4--0.5 contemporaneously and 0.6--0.7 over 2 years. If the change in defense spending is "permanent" (gauged by Ramey's defense news variable), the multipliers are higher by 0.1--0.2. Since all estimated multipliers are significantly less than 1, greater spending crowds out other components of GDP, particularly investment. The lack of good instruments prevents estimation of reliable multipliers for nondefense purchases; multipliers in the literature of two or more likely reflect reverse causation from GDP to nondefense purchases. Increases in average marginal income tax rates (measured by a newly constructed time series) have significantly negative effects on GDP. When interpreted as a tax multiplier, the magnitude is around 1.1. The combination of the estimated spending and tax multipliers implies that the balanced-budget multiplier for defense spending is negative. We have some evidence that tax changes affect GDP mainly through substitution effects, rather than wealth effects. Copyright 2011, Oxford University Press.

Suggested Citation

  • Robert J. Barro & Charles J. Redlick, 2011. "Macroeconomic Effects From Government Purchases and Taxes," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(1), pages 51-102.
    • Handle: RePEc:oup:qjecon:v:126:y:2011:i:1:p:51-102
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    File URL: http://hdl.handle.net/10.1093/qje/qjq002
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    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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