Understanding the Size of the Government Spending Multiplier: It's in the Sign

53 Pages Posted: 18 Jul 2017

See all articles by Regis Barnichon

Regis Barnichon

Federal Reserve Bank of San Francisco

Christian Matthes

Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: June 2017

Abstract

The literature on the government spending multiplier has implicitly assumed that an increase in government spending has the same (mirror-image) effect as a decrease in government spending. We show that relaxing this assumption is important to understand the effects of fiscal policy. Regardless of whether we identify government spending shocks from (i) a narrative approach, or (ii) a timing restriction, we find that the contractionary multiplier – the multiplier associated with a negative shock to government spending – is above 1 and even larger in times of economic slack. In contrast, the expansionary multiplier – the multiplier associated with a positive shock – is substantially below 1 regardless of the state of the cycle. These results help understand seemingly conflicting results in the literature.

JEL Classification: E62, C32

Suggested Citation

Barnichon, Regis and Matthes, Christian, Understanding the Size of the Government Spending Multiplier: It's in the Sign (June 2017). Available at SSRN: https://ssrn.com/abstract=3000623 or http://dx.doi.org/10.2139/ssrn.3000623

Regis Barnichon (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Christian Matthes

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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