Working Paper: NBER ID: w14782
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 modelling 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: government spending; New Keynesian; Old Keynesian; multipliers; fiscal policy
JEL Codes: C52; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in government purchases of 1% of GDP (E62) | Increase in real GDP by 1.6% (E20) |
| Higher government spending (H59) | Increased GDP in Romer-Bernstein models (O41) |
| Higher government spending (H59) | Smaller increase in GDP in Smets-Wouters model (E19) |
| Higher government spending (H59) | Negative impacts on private sector consumption and investment (E20) |
| Estimated multipliers from New Keynesian models (C54) | Much less than those from Old Keynesian models (E19) |