Macroeconomic Effects from Government Purchases and Taxes

62 Pages Posted: 21 Sep 2009  

Robert J. Barro

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Charles Redlick

Harvard University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 2009

Abstract

For U.S. annual data that include WWII, the estimated multiplier for temporary defense spending is 0.4-0.5 contemporaneously and 0.6-0.7 over two years. If the change in defense spending is "permanent" (gauged by Ramey's defense-news variable), the multipliers are higher by 0.1-0.2. The estimated multipliers are all significantly less than one and apply for given average marginal income-tax rates. We cannot estimate reliable multipliers for non-defense purchases because of the lack of good instruments. Since the defense-spending multipliers are less than one, greater spending crowds out other components of GDP, mainly investment, but also non-defense government purchases and net exports. Consumer expenditure on non-durables and services has only a small response. In a post-1950 sample, increases in average marginal income-tax rates (measured by a newly constructed time series) have significantly negative effects on GDP. When interpreted as a tax multiplier, the magnitude is around 1.1. When we hold constant marginal tax rates, we find no statistically significant effects on GDP from changes in federal tax revenue (using the Romer-Romer exogenous federal tax-revenue change as an instrument). In contrast, with revenue held constant, increases in marginal tax rates still have a statistically significant negative effect on GDP. Therefore, tax changes seem to affect GDP mainly through substitution effects, rather than wealth effects. The combination of the estimated spending and tax multipliers implies that balanced-budget multipliers for defense spending are negative.

Suggested Citation

Barro, Robert J. and Redlick, Charles, Macroeconomic Effects from Government Purchases and Taxes (September 2009). NBER Working Paper No. w15369. Available at SSRN: https://ssrn.com/abstract=1475560

Robert J. Barro (Contact Author)

National Bureau of Economic Research (NBER)

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Harvard University - Department of Economics ( email )

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617-495-3203 (Phone)

Charles Redlick

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

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