Are Government Spending Multipliers Greater during Periods of Slack? Evidence from Twentieth-Century Historical Data

A key question that has arisen during recent debates is whether government spending multipliers are larger during periods of slack. Some researchers and policymakers have argued that while government spending multipliers are estimated to be modest on average, they might become greater during times when resources are underutilized. Auerbach and Gorodnichenko (2012, forthcoming)—henceforth, AG—test this hypothesis and find larger multipliers during recessions in both quarterly post-World War II US data and in annual cross-country panel data since 1985. Their findings suggest multipliers near zero during expansions but between 1.5 and 2 during recessions. Fazzari, Morley, and Panovska (2012) confirm these findings using different methods and measures of slack in US data since 1967. Gordon and Krenn (2010) find that multipliers are larger before mid-1941 than after in their analysis of US data from 1919 to 1953. In addition, numerous cross-state analyses estimate bigger multipliers during periods of slack. On the other hand, Crafts and Mills (2012) analyze government spending multipliers in UK data from Are Government Spending Multipliers Greater during Periods of Slack? Evidence from Twentieth-Century Historical Data