Clearing Up the Fiscal Multiplier Morass

57 Pages Posted: 23 Sep 2011 Last revised: 1 Mar 2021

See all articles by Eric M. Leeper

Eric M. Leeper

University of Virginia ; Indiana University at Bloomington - Department of Economics; National Bureau of Economic Research (NBER)

Nora Traum

North Carolina State University - Department of Economics

Todd B. Walker

Indiana University Bloomington - Department of Economics

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Date Written: September 2011

Abstract

Bayesian prior predictive analysis of five nested DSGE models suggests that model specifications and prior distributions tightly circumscribe the range of possible government spending multipliers. Multipliers are decomposed into wealth and substitution effects, yielding uniform comparisons across models. By constraining the multiplier to tight ranges, model and prior selections bias results, revealing less about fiscal effects in data than about the lenses through which researchers choose to interpret data. When monetary policy actively targets inflation, output multipliers can exceed one, but investment multipliers are likely to be negative. Passive monetary policy produces consistently strong multipliers for output, consumption, and investment.

Suggested Citation

Leeper, Eric Michael and Traum, Nora and Walker, Todd B., Clearing Up the Fiscal Multiplier Morass (September 2011). NBER Working Paper No. w17444, Available at SSRN: https://ssrn.com/abstract=1932575

Eric Michael Leeper (Contact Author)

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Nora Traum

North Carolina State University - Department of Economics ( email )

Raleigh, NC 27695-8110
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HOME PAGE: http://www4.ncsu.edu/~njtraum/

Todd B. Walker

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

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