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A Pitfall with DSGE-Based, Estimated, Government Spending Multipliers

  • Fève, Patrick
  • Matheron, Julien
  • Sahuc, Jean-Guillaume

This paper examines issues related to the estimation of the government spending multiplier (GSM) in a Dynamic Stochastic General Equilibrium context. We stress a potential source of bias in the GSM arising from the combination of Edgeworth complementarity/substitutability between private consumption and government expenditures and endogenous government expenditures. Due to crossequation 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 prove to be robust to a number of perturbations.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 708.

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Date of creation: Apr 2012
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Publication status: Published in American Economic Journal: Macroeconomics, vol.�5, n°4, octobre 2013, p.�141-178.
Handle: RePEc:ide:wpaper:25756
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