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.
Toulouse School of Economics (GREMAQ, IDEI, IUF, and Banque de France)
Banque de France
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.
A Pitfall with DSGE–Based, Estimated, Government Spending Multipliers...
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