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Does the Government Spending Multiplier Depend on the Business Cycle?

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  • SEBASTIAN LAUMER
  • COLLIN PHILIPPS

Abstract

We investigate the state dependency of the government spending multiplier across the business cycle using a nonlinear two‐regime VAR model. We find little evidence that multipliers vary between expansionary and recessionary periods. This is because the state of the business cycle itself changes after government spending shocks and converges toward a similar state. This result holds true regardless of how we model the business cycle. Our analysis shows that assumptions about the economic state built into linear impulse response functions are the key driver of the state dependency reported elsewhere in the literature.

Suggested Citation

  • Sebastian Laumer & Collin Philipps, 2024. "Does the Government Spending Multiplier Depend on the Business Cycle?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(8), pages 2001-2022, December.
    • Handle: RePEc:wly:jmoncb:v:56:y:2024:i:8:p:2001-2022
    DOI: 10.1111/jmcb.13086
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