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

Patrick Fève, Julien Matheron and Jean-Guillaume Sahuc

No 12-289, TSE Working Papers from Toulouse School of Economics (TSE)

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 crossequation 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: Government spending rules; DSGE models; Edgeworth complementarity/substitutability; Multiplier (search for similar items in EconPapers)
JEL-codes: C32 E32 E62 (search for similar items in EconPapers)
Date: 2012-04
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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http://www.tse-fr.eu/sites/default/files/medias/doc/by/feve/wp_tse_289.pdf Forthcoming in American Economic Journal: Macroeconomics (application/pdf)

Related works:
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:tse:wpaper:25755

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