Working Paper

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

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.

Keywords: government spending; ;

JEL Classification: C32; E62;

Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Working Paper

Publication Date: 2017-12-15

Number: 17-15

Pages: 53 pages