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

This paper examines issues related to the estimation of the long-run government spending multiplier (GSM) in a Dynamic Stochastic General Equilibrium context.

Author(s):

Patrick Feve

Toulouse School of Economics (GREMAQ, IDEI, IUF, and Banque de France)

Julien Matheron

Banque de France

Jean-Guillaume Sahuc

EDHEC Business School

We stress a potential source of bias in the GSM arising from the combination of Edgeworth complementarity between private consumption and government expenditures and countercyclical 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.
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A Pitfall with DSGE–Based, Estimated, Government Spending Multipliers...
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Type: Working paper
Date: le 08/08/2011
Extra information : For more information, please contact Joanne Finlay, EDHEC Research and Development Department [ [email protected] ] The contents of this paper do not necessarily reflect the opinions of EDHEC Business School.
Research Cluster : Finance

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