Macroeconomic Effects from Government Purchases and Taxes

Robert Barro and Charles J. Redlick ()
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Charles J. Redlick: Harvard University

No 232, ADB Economics Working Paper Series from Asian Development Bank

Abstract: For United States annual data that include World War II, the estimated multiplier for temporary defense spending is 0.4–0.5 contemporaneously and 0.6–0.7 over 2 years. If the change in defense spending is "permanent" (gauged by Ramey's defense-news variable), the multipliers are higher by 0.1–0.2. Since all estimated multipliers are significantly less than 1, greater spending crowds out other components of gross domestic product (GDP), particularly investment. The lack of good instruments prevents estimation of reliable multipliers for nondefense purchases; multipliers in the literature of two or more likely reflect reverse causation from GDP to nondefense purchases. In a post-1950 sample, increases in average marginal income tax rates (measured by a newly constructed time series) have significantly negative effects on GDP. When interpreted as a tax multiplier, the magnitude is around 1.1. The combination of the estimated spending and tax multipliers implies that the balanced-budget multiplier for defense spending is negative. We have some evidence that tax changes affect GDP mainly through substitution effects, rather than wealth effects.

Keywords: defense spending; fiscal policy; GDP multipliers; tax changes; United States (search for similar items in EconPapers)
JEL-codes: E62 H56 N12 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2010-11-01
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Related works:
Journal Article: Macroeconomic Effects From Government Purchases and Taxes (2011)
Working Paper: Macroeconomic Effects from Government Purchases and Taxes (2011)
Working Paper: Macroeconomic Effects from Government Purchases and Taxes (2009)
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