Working Paper: NBER ID: w20719
Authors: Valerie A. Ramey; Sarah Zubairy
Abstract: This paper investigates whether U.S. government spending multipliers differ according to two potentially important features of the economy: (1) the amount of slack and (2) whether interest rates are near the zero lower bound. We shed light on these questions by analyzing new quarterly historical U.S. data covering multiple large wars and deep recessions. We estimate a state-dependent model in which impulse responses and multipliers depend on the average dynamics of the economy in each state. We find no evidence that multipliers differ by the amount of slack in the economy. These results are robust to many alternative specifications. The results are less clear for the zero lower bound. For the entire sample, there is no evidence of elevated multipliers near the zero lower bound. When World War II is excluded, some point estimates suggest higher multipliers during the zero lower bound state, but they are not statistically different from the normal state. Our results imply that, contrary to recent conjecture, government spending multipliers were not necessarily higher than average during the Great Recession.
Keywords: Government Spending; Multipliers; Economic Slack; Zero Lower Bound
JEL Codes: E52; E62; N12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government spending multipliers (E62) | slack (unemployment rate) (J64) |
| government spending multipliers (E62) | zero lower bound (ZLB) on interest rates (E43) |
| slack (unemployment rate) (J64) | government spending multipliers (E62) |
| zero lower bound (ZLB) on interest rates (E43) | government spending multipliers (E62) |