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American Economic Journal: Macroeconomics: Vol. 5 No. 4 (October 2013)

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A Pitfall with Estimated DSGE-Based Government Spending Multipliers

Article Citation

Fève, Patrick, Julien Matheron, and Jean-Guillaume Sahuc. 2013. "A Pitfall with Estimated DSGE-Based Government Spending Multipliers." American Economic Journal: Macroeconomics, 5(4): 141-78.

DOI: 10.1257/mac.5.4.141

Abstract

This paper examines issues related to the estimation of the government spending multiplier (GSM) in a DSGE context. We stress a source of bias in the GSM arising from the combination of endogenous government expenditures and Edgeworth complementarity between private consumption and government expenditures. Due to cross-equation 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 are robust to a number of perturbations.

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Authors

Fève, Patrick (U Toulouse I Capitole and Bank of France)
Matheron, Julien (Bank of France)
Sahuc, Jean-Guillaume (Bank of France)

JEL Classifications

E13: General Aggregative Models: Neoclassical
E23: Macroeconomics: Production
E32: Business Fluctuations; Cycles
E62: Fiscal Policy
H50: National Government Expenditures and Related Policies: General

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