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 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 prove to be robust to a number of perturbations.
Patrick Fève, Julien Matheron et Jean-Guillaume Sahuc
Classification JEL : C32, E32, E62
Keywords : : DSGE models, Edgeworth complementarity/substitutability, Government spending rules, Multiplier.
Updated on: 06/12/2018 11:09