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.
Government spending rules; DSGE models; Edgeworth complementarity/substitutability; Multiplier;
- E13: Neoclassical
- E23: Production
- E32: Business Fluctuations • Cycles
- E62: Fiscal Policy
- H50: General
Patrick Fève, Julien Matheron, and Jean-Guillaume Sahuc, “A Pitfall with DSGE-Based, Estimated, Government Spending Multipliers”, TSE Working Paper, n. 12-289, April 2012.
American Economic Journal: Macroeconomics, vol. 5, n. 4, October 2013, pp. 141–178