Government spending multipliers in (un)certain times.

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Date: Nov. 2021
Publisher: Elsevier B.V.
Document Type: Report; Brief article
Length: 327 words

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Keywords Fiscal policy; Government spending multiplier; Uncertainty; Structural vector autoregressions; Heteroskedasticity Highlights * We estimate the dynamic effects of government spending shocks, using time-varying volatility in US data. * We find that the average government spending multiplier is significantly and persistently above one. * We rationalize the results empirically through a contemporaneously countercyclical response of government spending and an efficient weighting of observations inversely to their error variance. * We show that the multiplier is significantly smaller when volatility is high. Abstract We estimate the dynamic effects of government spending shocks, using time-varying volatility in US data modeled through a Markov switching process. We find that the average government spending multiplier is significantly and persistently above one, driven by a crowding-in of private consumption and non-residential investment. We rationalize the results empirically through a contemporaneously countercyclical response of government spending and an efficient weighting of observations inversely to their error variance. We then show that the multiplier is significantly smaller when volatility is high, consistent with theories predicting reduced effectiveness of fiscal interventions in uncertain times. Author Affiliation: (a) DIW Berlin, Germany (b) Humboldt-Universität Berlin, Germany (c) Sveriges Riksbank, Sweden (d) Martin-Luther-University Halle-Wittenberg, Faculty of Law, Economics and Business, Department of Economics, Chair of Monetary Economics, 06099 Halle, Germany * Corresponding author at: Martin-Luther-University Halle-Wittenberg, Faculty of Law, Economics and Business, Department of Economics, Chair of Monetary Economics, 06099 Halle, Germany Article History: Received 21 September 2020; Revised 16 July 2021; Accepted 3 September 2021 (footnote)[white star] We thank Nadav Ben Zeev, Francesco Bianchi, Fabio Canova, Carlo Favero, Ethan Ilzetzki, Christophe Kamps, Helmut Lütkepohl, Morten Ravn, Nora Traum and participants of the CEF Milan, Verein für Socialpolitik, European Central Bank and DIW seminars for helpful comments and suggestions. The opinions expressed in this article are the sole responsibility of the authors and should not be interpreted as reflecting the views of Sveriges Riksbank. Byline: Jan Philipp Fritsche [jfritsche@diw.de] (a,b), Mathias Klein [mathias.klein@riksbank.se] (c), Malte Rieth [malte.rieth@wiwi.uni-halle.de] (a,d,*)

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Gale Document Number: GALE|A680426878