Macroeconomic Effects from Government Purchases and Taxes

Robert J. Barro, Charles J. Redlick

NBER Working Paper No. 15369
Issued in September 2009
NBER Program(s):   EFG   ME   PE

For U.S. annual data that include WWII, the estimated multiplier for temporary defense spending is 0.4-0.5 contemporaneously and 0.6-0.7 over two years. If the change in defense spending is "permanent" (gauged by Ramey's defense-news variable), the multipliers are higher by 0.1-0.2. The estimated multipliers are all significantly less than one and apply for given average marginal income-tax rates. We cannot estimate reliable multipliers for non-defense purchases because of the lack of good instruments. Since the defense-spending multipliers are less than one, greater spending crowds out other components of GDP, mainly investment, but also non-defense government purchases and net exports. Consumer expenditure on non-durables and services has only a small response. In a post-1950 sample, increases in average marginal income-tax rates (measured by a newly constructed time series) have significantly negative effects on GDP. When interpreted as a tax multiplier, the magnitude is around 1.1. When we hold constant marginal tax rates, we find no statistically significant effects on GDP from changes in federal tax revenue (using the Romer-Romer exogenous federal tax-revenue change as an instrument). In contrast, with revenue held constant, increases in marginal tax rates still have a statistically significant negative effect on GDP. Therefore, tax changes seem to affect GDP mainly through substitution effects, rather than wealth effects. The combination of the estimated spending and tax multipliers implies that balanced-budget multipliers for defense spending are negative.

download in pdf format
   (332 K)

email paper

This paper was revised on December 5, 2011

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15369

Published: “Macroeconomic Effects of Government Purchases and Taxes” (with C.J. Redlick), Quarterly Journal of Economics , February 2011. citation courtesy of

Users who downloaded this paper also downloaded these:
Nakamura, Steinsson, Barro, and Ursua w15920 Crises and Recoveries in an Empirical Model of Consumption Disasters
Christiano, Eichenbaum, and Rebelo w15394 When is the government spending multiplier large?
Barro and Sala-i-Martin w3362 Public Finance in Models of Economic Growth
Ramey w15464 Identifying Government Spending Shocks: It's All in the Timing
Auerbach and Gale w15407 Activist Fiscal Policy to Stabilize Economic Activity
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us