A Pitfall with DSGE-Based, Estimated, Government Spending Multipliers

P. F ve, Julien Matheron and Jean-Guillaume Sahuc
Authors registered in the RePEc Author Service: Patrick Fève

Working papers from Banque de France

Abstract: This paper examines issues related to the estimation of the government spending multiplier (GSM) in a Dynamic Stochastic General Equilibrium context. We stress a potential source of bias in the GSM arising from the combination of Edgeworth complementarity/substitutability between private consumption and government expenditures and endogenous 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 prove to be robust to a number of perturbations.

Keywords: DSGE models; Edgeworth complementarity/substitutability; Government spending rules; Multiplier. (search for similar items in EconPapers)
JEL-codes: C32 E32 E62 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2012
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: A Pitfall with Estimated DSGE-Based Government Spending Multipliers (2013)
Working Paper: A Pitfall with DSGE-Based, Estimated, Government Spending Multipliers (2012)
Working Paper: A Pitfall with DSGE-Based, Estimated, Government Spending Multipliers (2012)
Working Paper: A Pitfall with DSGE–Based, Estimated, Government Spending Multipliers (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:379

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