Working paper

The effects of government spending endogeneity on estimated multipliers in the US

Alban Moura

Abstract

This paper uses an estimated sticky-price model to identify endogenous movements in government consumption in the U.S. economy. Two feedback effects are considered, one originating from the stock of public debt and one from contemporaneous output. The data provide significant statistical evidence in favor of such mechanisms, even though a subsample analysis reveals that their strength may have decreased over time. Monte Carlo simulations assessing a DSGE model with exogenous spending and various identified VARs suggest that failing to account for these feedbacks may induce a severe upward bias in estimated multipliers.

Keywords

Government spending multiplier; endogenous fiscal policy; structural econometrics;

JEL codes

  • C32: Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes
  • E62: Fiscal Policy
  • H30: General

See also

Published in

TSE Working Paper, n. 15-610, November 2015