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A Pitfall with DSGE-Based, Estimated, Government Spending Multipliers

Fève, Patrick, Matheron, Julien and Sahuc, Jean-Guillaume (2012) A Pitfall with DSGE-Based, Estimated, Government Spending Multipliers. TSE Working Paper, n. 12-289

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Official URL: http://tse-fr.eu/pub/25755

Abstract

This paper examines issues related to the estimation of the government spending multiplier (GSM) in a Dynamic Stochastic General Equilibrium context. We stress a potential source of bias in the GSM arising from the combination of Edgeworth complementarity/substitutability between private
consumption and government expenditures and endogenous government expenditures. Due to crossequation restrictions, omitting the endogenous component of government policy at the estimation stage would lead an econometrician to underestimate the degree of Edgeworth complementarity and,
consequently, the long-run GSM. An estimated version of our model with US postwar data shows that this bias matters quantitatively. The results prove to be robust to a number of perturbations.

Item Type: Monograph (Working Paper)
Language: English
Date: April 2012
Uncontrolled Keywords: Government spending rules, DSGE models, Edgeworth complementarity/substitutability, Multiplier
JEL codes: C32 - Time-Series Models
E32 - Business Fluctuations; Cycles
E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:24
Last Modified: 07 Mar 2018 13:22
OAI ID: oai:tse-fr.eu:25755
URI: http://publications.ut-capitole.fr/id/eprint/15252

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