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.
"A Pitfall with Estimated DSGE-Based Government Spending Multipliers."
American Economic Journal: Macroeconomics,
General Aggregative Models: Neoclassical
Business Fluctuations; Cycles
National Government Expenditures and Related Policies: General