Working Paper: NBER ID: w17787
Authors: Valerie A. Ramey
Abstract: This paper asks whether increases in government spending stimulate private activity. The first part of the paper studies private spending. Using a variety of identification methods and samples, I find that in most cases private spending falls significantly in response to an increase in government spending. These results imply that the average GDP multiplier lies below unity. In order to determine whether concurrent increases in tax rates dampen the spending multiplier, I use two different methods to adjust for tax effects. Neither method suggests significant effects of current tax rate changes on the spending multiplier. In the second part of the paper, I explore the effects of government spending on labor markets. I find that increases in government spending lower unemployment. Most specifications and samples imply, however, that virtually all of the effect is through an increase in government employment, not private employment. I thus conclude that on balance government spending does not appear to stimulate private activity.
Keywords: government spending; private activity; GDP multiplier; unemployment
JEL Codes: E24; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government Spending (H59) | Private Spending (H59) |
| Government Spending (H59) | Government Employment (J45) |
| Government Spending Shocks (E62) | Private Sector Spending (H59) |
| Government Spending (H59) | Private Employment (J68) |
| Government Spending (H59) | Unemployment (J64) |
| Government Spending (H59) | Private Activity (Y70) |
| Tax Rate Changes (H29) | Spending Multiplier (E62) |