Reference

Patrick Fève, Julien Matheron, and Jean-Guillaume Sahuc, A Pitfall with Estimated DSGE-Based Government Spending Multipliers, American Economic Journal: Macroeconomics, vol. 5, n. 4, October 2013, pp. 141–178.

Abstract

This paper examines issues related to the estimation of the government spending multiplier (GSM) in a DSGE context. We stress a source of bias in the GSM arising from the combination of endogenous government expenditures and Edgeworth complementarity between private consumption and government expenditures. Due to cross-equation 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 are robust to a number of perturbations.

Keywords

Government spending rules; DSGE models; Edgeworth complementarity/substitutability; Multiplier

JEL codes

  • E13: Neoclassical
  • E23: Production
  • E32: Business Fluctuations • Cycles
  • E62: Fiscal Policy
  • H50: General