Fiscal Multipliers in Recessions and Expansions: Does it Matter Whether Government Spending is Increasing or Decreasing?

35 Pages Posted: 20 Apr 2016

See all articles by Daniel Riera-Crichton

Daniel Riera-Crichton

Bates College

Carlos A. Vegh

University of Maryland - Department of Economics; University of California at Los Angeles; National Bureau of Economic Research (NBER); Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS)

Guillermo Vuletin

Brookings Institution

Date Written: July 1, 2014

Abstract

Using non-linear methods, this paper finds that existing estimates of government spending multipliers in expansion and recession may yield biased results by ignoring whether government spending is increasing or decreasing. For industrial countries, the problem originates in the fact that, contrary to one's priors, it is not always the case that government spending is going up in recessions (i.e., acting countercyclically). In almost as many cases, government spending is actually going down (i.e., acting procyclically). Since the economy does not respond symmetrically to government spending increases or decreases, the "true" long-run multiplier for bad times (and government spending going up) turns out to be 2.3 compared to 1.3 if we just distinguish between recession and expansion. In the case of developing countries, the bias results from the fact that the multiplier for recessions and government spending going down (the "when-it-rains-it-pours" phenomenon) is larger than when government spending is going up.

Keywords: Fiscal & Monetary Policy, Consumption

Suggested Citation

Riera-Crichton, Daniel and Vegh, Carlos A. and Vuletin, Guillermo, Fiscal Multipliers in Recessions and Expansions: Does it Matter Whether Government Spending is Increasing or Decreasing? (July 1, 2014). World Bank Policy Research Working Paper No. 6993. Available at SSRN: https://ssrn.com/abstract=2475080

Daniel Riera-Crichton

Bates College ( email )

Lewiston, ME 04240
United States

Carlos A. Vegh

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

University of California at Los Angeles ( email )

Box 951477
Los Angeles, CA 90095-1477
United States
310-825-7371 (Phone)
310-825-9528 (Fax)

HOME PAGE: http://vegh.sscnet.ucla.edu

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
United States

Guillermo Vuletin

Brookings Institution ( email )

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