Clearing Up the Fiscal Multiplier Morass
Bayesian prior predictive analysis of five nested DSGE models suggests that model specifications and prior distributions tightly circumscribe the range of possible government spending multipliers. Multipliers are decomposed into wealth and substitution effects, yielding uniform comparisons across models. By constraining the multiplier to tight ranges, model and prior selections bias results, revealing less about fiscal effects in data than about the lenses through which researchers choose to interpret data. When monetary policy actively targets inflation, output multipliers can exceed one, but investment multipliers are likely to be negative. Passive monetary policy produces consistently strong multipliers for output, consumption, and investment.
We would like to thank seminar participants at the Bank of Canada, the 2011 Bundesbank Spring Conference, the Federal Reserve Bank of Dallas, the 2011 Konstanz Seminar on Monetary Theory and Policy, the 2011 SED annual meeting, and Henning Bohn, Berthold Herrendorf, Giorgio Primiceri, Morten Raven and Harald Uhlig for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Eric M. Leeper & Nora Traum & Todd B. Walker, 2017. "Clearing Up the Fiscal Multiplier Morass," American Economic Review, vol 107(8), pages 2409-2454. citation courtesy of