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G-multipliers in Canada: How large? And Why?

Fabrice Dabiré (), Hashmat Khan (), Patrick Richard () and Jean-François Rouillard ()
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Fabrice Dabiré: Université de Sherbrooke
Patrick Richard: Université de Sherbrooke

Cahiers de recherche from Departement d'Economique de l'École de gestion à l'Université de Sherbrooke

Abstract: We estimate the effects of government spending on GDP in Canada using the sign restrictions approach with quarterly data that spans from 1961 to 2019. The variables that enter our vector autoregressive model are carefully chosen to reflect the distinct characteristics of the economy, in particular, its linkages with US business cycles. We find large multipliers that are above 2 on impact and in the long-run. They are not specific to the state of the economy. Moreover, neither net exports and real exchange rates nor terms-of-trade respond significantly to the government spending shock. Hence, we explore two channels that involve specific closed-economy characteristics of Canada to explain the size of the multipliers. First, the production of public goods in Canada features a much larger labour share than the production of private goods. Second, we argue that the level of public capital relative to its GDP is suboptimal. Based on a general equilibrium model, we show and explain how these two characteristics matter for the multipliers.

Keywords: government spending multipliers; sign restrictions; Canadian economy (search for similar items in EconPapers)
JEL-codes: C51 E32 E62 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2021-10
New Economics Papers: this item is included in nep-mac
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Handle: RePEc:shr:wpaper:21-01