Working Paper: NBER ID: w19749
Authors: Eric Sims; Jonathan Wolff
Abstract: This paper studies the state-dependence of the output and welfare effects of shocks to government purchases in a canonical medium scale DSGE model. When monetary policy is characterized by a Taylor rule, the output multiplier (the change in output for a one unit change in government spending) is countercyclical but close to constant across states of the business cycle, whereas the welfare multiplier (the consumption equivalent change in a measure of aggregate welfare for the same change in government spending) is quite volatile and procyclical. These results are robust to different means of fiscal finance. When the nominal interest rate is unresponsive to economic conditions, such as would be the case at the zero lower bound, both the output and welfare multipliers are larger and move significantly more across states than under a Taylor rule. The welfare multiplier is still procyclical under passive monetary policy, albeit less so than under a Taylor rule.
Keywords: government spending; business cycle; output multiplier; welfare multiplier; fiscal policy
JEL Codes: E0; E1; E2; E3; E31; E6; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government spending shocks (E62) | output multiplier (E23) |
| output multiplier (E23) | output (C67) |
| government spending shocks (E62) | welfare multiplier (D69) |
| welfare multiplier (D69) | welfare (I38) |
| output multiplier (E23) | welfare multiplier (D69) |
| welfare multiplier (D69) | output (C67) |
| government spending (distortionary taxes) (H31) | output multiplier (E23) |
| government spending shocks (E62) | welfare multiplier (procyclical) (D69) |