Working Paper: NBER ID: w17444
Authors: Eric M. Leeper; Nora Traum; Todd B. Walker
Abstract: Bayesian prior predictive analysis of five nested DSGE models suggests that model specifications and prior distributions tightly circumscribe the range of possible government spending multipliers. Multipliers are decomposed into wealth and substitution effects, yielding uniform comparisons across models. By constraining the multiplier to tight ranges, model and prior selections bias results, revealing less about fiscal effects in data than about the lenses through which researchers choose to interpret data. When monetary policy actively targets inflation, output multipliers can exceed one, but investment multipliers are likely to be negative. Passive monetary policy produces consistently strong multipliers for output, consumption, and investment.
Keywords: Fiscal Multiplier; Bayesian Analysis; DSGE Models
JEL Codes: C11; E62; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| active monetary policy (E63) | output multipliers exceed one (E23) |
| active monetary policy (E63) | investment multipliers are likely to be negative (E22) |
| passive monetary policy (E63) | fiscal policy amplifies impacts (E62) |
| fiscal policy amplifies impacts (E62) | stronger output, consumption, and investment multipliers (E20) |
| presence of rule-of-thumb consumers (D11) | attenuate negative wealth effects (E21) |
| attenuate negative wealth effects (E21) | increase the multiplier (C39) |
| nominal rigidities (D50) | flip the sign of substitution effects from negative to positive (H23) |
| flip the sign of substitution effects from negative to positive (H23) | contribute to larger multipliers (C39) |