Understanding the size of the government spending multiplier: It’s in the sign

Régis Barnichon, Davide Debortoli and Christian Matthes

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: This paper argues that an important, yet overlooked, determinant of the government spending multiplier is the direction of the fiscal intervention. Regardless of whether we identify government spending shocks from (i) a narrative approach, or (ii) a timing restriction, we find that the contractionary multiplier - the multiplier associated with a negative shock to government spending - is above 1 and largest in times of economic slack. In contrast, the expansionary multiplier - the multiplier associated with a positive shock - is substantially below 1 regardless of the state of the cycle. These results help understand seemingly conflicting results in the literature. A simple theoretical model with incomplete financial markets and downward nominal wage rigidities can rationalize our findings.

Keywords: Public debt; optimal taxation; fiscal policy (search for similar items in EconPapers)
JEL-codes: C32 E62 (search for similar items in EconPapers)
Date: 2019-02, Revised 2020-09
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Understanding the Size of the Government Spending Multiplier: It’s in the Sign (2022)
Working Paper: Understanding the Size of the Government Spending Multiplier: It's in the Sign (2020)
Working Paper: Understanding the Size of the Government Spending Multiplier: It's in the Sign (2020)
Working Paper: Understanding the Size of the Government Spending Multiplier: It's in the Sign (2017)
Working Paper: Understanding the Size of the Government Spending Multiplier: It's in the Sign (2016)
Working Paper: Understanding the size of the government spending multiplier: It's in the sign (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1688

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