Working Paper: NBER ID: w20533
Authors: Daniel Riera-Crichton; Carlos A. Vegh; Guillermo Vuletin
Abstract: Using non-linear methods, we argue that existing estimates of government spending multipliers in expansion and recession may yield biased results by ignoring whether government spending is increasing or decreasing. In the case of OECD countries, the problem originates in the fact that, contrary to one’s priors, it is not always the case that government spending is going up in recessions (i.e., acting countercyclically). In almost as many cases, government spending is actually going down (i.e., acting procyclically). Since the economy does not respond symmetrically to government spending increases or decreases, the “true” long-run multiplier for bad times (and government spending going up) turns out to be 2.3 compared to 1.3 if we just distinguish between recession and expansion. In extreme recessions, the long-run multiplier reaches 3.1.
Keywords: fiscal multipliers; government spending; OECD countries; business cycle; nonlinear methods
JEL Codes: E62; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government spending increases during recessions (E62) | long-run fiscal multiplier is 2.3 (E62) |
| government spending increases during expansions (E62) | long-run fiscal multiplier is 1.3 (E62) |
| extreme recessions (E32) | long-run fiscal multiplier can reach 3.1 (E62) |
| government spending decreases during bad times (E62) | long-run multiplier is not significantly different from zero (E19) |
| failing to differentiate between increases and decreases in government spending (E62) | underestimation of the fiscal multiplier in recessions (E62) |