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Macroeconomic Effects From Government Purchases and Taxes

  • Robert J. Barro
  • Charles J. Redlick

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.

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Article provided by Oxford University Press in its journal The Quarterly Journal of Economics.

Volume (Year): 126 (2011)
Issue (Month): 1 ()
Pages: 51-102

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Handle: RePEc:oup:qjecon:v:126:y:2011:i:1:p:51-102
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  1. Robert J. Barro, 1980. "Output Effects of Government Purchases," NBER Working Papers 0432, National Bureau of Economic Research, Inc.
  2. Robert J. Barro & Chaipat Sahasakul, 1983. "Measuring the Average Marginal Tax Rate from the Individual Income Tax," NBER Working Papers 1060, National Bureau of Economic Research, Inc.
  3. Barro, Robert J & Sahasakul, Chaipat, 1986. "Average Marginal Tax Rates from Social Security and the Individual Income Tax," The Journal of Business, University of Chicago Press, vol. 59(4), pages 555-66, October.
  4. Albert Marcet & Thomas J. Sargent & Juha Seppala, 1996. "Optimal taxation without state-contingent debt," Economics Working Papers 170, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2001.
  5. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
  6. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  7. Ramey, Valerie A. & Shapiro, Matthew D., 1998. "Costly capital reallocation and the effects of government spending," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 145-194, June.
  8. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
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