A Pitfall with Estimated DSGE-Based Government-Spending Multipliers

Patrick Fève, Julien Matheron and Jean-Guillaume Sahuc

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Abstract: This paper examines issues related to the estimation of the government spending multiplier (GSM) in a DSGE context. We stress a source of bias in the GSM arising from the combination of endogenous government expenditures and Edgeworth complementarity between private consumption and 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 are robust to a number of perturbations.

Date: 2013
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Citations: View citations in EconPapers (42)

Published in American Economic Journal: Macroeconomics, 2013, 5 (4), pp.141-178. ⟨10.1257/mac.5.4.141⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01612704

DOI: 10.1257/mac.5.4.141

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