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The Output and Welfare Effects of Government Spending Shocks over the Business Cycle

  • Eric Sims
  • Jonathan Wolff

This paper studies the state-dependence of the output and welfare effects of shocks to government purchases in a canonical medium scale DSGE model. When monetary policy is characterized by a Taylor rule, the output multiplier (the change in output for a one unit change in government spending) is countercyclical but close to constant across states of the business cycle, whereas the welfare multiplier (the consumption equivalent change in a measure of aggregate welfare for the same change in government spending) is quite volatile and procyclical. These results are robust to different means of fiscal finance. When the nominal interest rate is unresponsive to economic conditions, such as would be the case at the zero lower bound, both the output and welfare multipliers are larger and move significantly more across states than under a Taylor rule. The welfare multiplier is still procyclical under passive monetary policy, albeit less so than under a Taylor rule.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19749.

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Date of creation: Dec 2013
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Handle: RePEc:nbr:nberwo:19749
Note: EFG ME
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