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

Résumé

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.

Mots-clés

Government spending rules; DSGE models; Edgeworth complementarity/substitutability; Multiplier;

Codes JEL

C32: Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes
E32: Business Fluctuations • Cycles
E62: Fiscal Policy