A Pitfall with Estimated DSGE-Based Government Spending Multipliers | Zendy

Patrick Fève | Zendy; Julien Matheron | Zendy; Jean-Guillaume Sahuc | Zendy

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A Pitfall with Estimated DSGE-Based Government Spending Multipliers

Author(s) -

Patrick Fève,

Julien Matheron,

Jean-Guillaume Sahuc

Publication year - 2013

Publication title -

american economic journal macroeconomics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 10.443

H-Index - 61

eISSN - 1945-7707

pISSN - 1945-7715

DOI - 10.1257/mac.5.4.141

Subject(s) - dynamic stochastic general equilibrium , complementarity (molecular biology) , government spending , economics , econometrics , government expenditure , gsm , context (archaeology) , private consumption , government (linguistics) , estimation , welfare , macroeconomics , fiscal policy , monetary policy , public finance , computer science , market economy , telecommunications , paleontology , linguistics , philosophy , genetics , biology , management

This paper examines issues related to the estimation of the government spending multiplier (GSM) in a DSGE context. We stress a source of bias in the GSM arising from the combination of endogenous government expenditures and Edgeworth complementarity between private consumption and government expenditures. Due to cross-equation restrictions, omitting the endogenous component of government policy at the estimation stage would lead an econometrician to underestimate the degree of Edgeworth complementarity and, consequently, the long-run GSM. An estimated version of our model with US postwar data shows that this bias matters quantitatively. The results are robust to a number of perturbations

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