Working Paper: CEPR ID: DP7236
Authors: John F. Cogan; Tobias Cwik; John B. Taylor; Volker Wieland
Abstract: Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modeling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically-estimated and widely-cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small just when needed most, and GDP and employment effects are only one-sixth as large, with private sector employment impacts likely to be even smaller.
Keywords: Fiscal Policy; Government Spending; Keynesian Models; Model Uncertainty; Multiplier
JEL Codes: C52; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government spending multipliers in the Smets-Wouters model (E62) | GDP increase (O49) |
| Government spending multipliers in the Romer-Bernstein models (E62) | GDP increase (O49) |
| Smets-Wouters model predicts crowding out effect on private consumption and investment (E27) | Diminished effectiveness of government spending (E62) |
| Assumption of a constant zero interest rate (E43) | Inflationary pressures and instability (E31) |
| Differences in multipliers (Smets-Wouters vs Romer-Bernstein) (C59) | Evaluating fiscal policy effectiveness (E62) |
| Smets-Wouters model (E17) | Fewer jobs created compared to Romer-Bernstein analysis (J68) |