Fiscal Multiplier and the Size of Government Spending Shock. The Case of the U.S

34 Pages Posted: 5 Feb 2022

See all articles by Madina Karamysheva

Madina Karamysheva

National Research University Higher School of Economics

Nikita German

affiliation not provided to SSRN

Abstract

This paper investigates whether the fiscal multiplier depends negatively on the size of the government spending shock. We build our hypothesis on behavioral arguments and check it empirically using U.S. data. In doing so, we adopt a non-linear Local Projection method. We address possible endogeneity issues by using government military spending and illustrate that our results are non-sensible to these concerns. Finally, we limit our analysis to the government consumption multiplier, as our hypothesis suggests strong non-constancy in this respect. We find a strong negative relationship between the government spending multiplier and the size of the shock. Results are robust to different subsamples, fiscal foresight, business cycle, and different identification schemes.

Keywords: Fiscal multipliers, non-linearity, rational inattention, local projection

Suggested Citation

Karamysheva, Madina and German, Nikita, Fiscal Multiplier and the Size of Government Spending Shock. The Case of the U.S. Available at SSRN: https://ssrn.com/abstract=4027245 or http://dx.doi.org/10.2139/ssrn.4027245

Madina Karamysheva (Contact Author)

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

Nikita German

affiliation not provided to SSRN

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