Deconstructing the Fiscal Multiplier

Pontus Rendahl ()

No 1106, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: Using expectation data from the Survey of Professional Forecasters (SPF) we decompose the impact of government spending on output into three distinct and theoretically grounded channels: the Keynesian channel, linking current income to current private expenditures; the expected-inflation channel which stresses the need to engineer an inflationary spiral in order to reduces real interest rates; and the expected-output channel in which the persistence of output propagates the effect of current spending by altering expectations of future economic activity. Our findings reveal that the expected-output channel accounts for about 35% of the total impact of government spending on output, while the expected output channel is statistically insignificant with a point estimate of around 7%. While the expected-inflation channel seemingly gain some support by the data, the associated theoretical transmission mechanism is heavily put into question: The effect of expected future inflation on output is negative, and a rise in government spending is associated with a decrease in inflation. This contrasts sharply to the theoretical literature in which expected inflation affect output positively, and a rise in government spending is associated with an increase in inflation.

Date: 2015
New Economics Papers: this item is included in nep-mac
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