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The Effects of Government Spending Endogeneity on Estimated Multipliers in the U.S.

Alban Moura
Annals of Economics and Statistics
No. 121/122 (June 2016), pp. 359-384
Published by: GENES on behalf of ADRES
DOI: 10.15609/annaeconstat2009.121-122.359
Stable URL: http://www.jstor.org/stable/10.15609/annaeconstat2009.121-122.359
Page Count: 26
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The Effects of Government Spending Endogeneity on Estimated Multipliers in the U.S.
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Abstract

This paper uses an estimated sticky-price model to identify endogenous movements in government consumption in the U.S. economy. Two feedback effects are considered, one originating from the stock of public debt, and one from contemporaneous output. The data provides significant statistical evidence in favor of such mechanisms, even though a subsample analysis reveals that their strength may have decreased over time. Monte Carlo simulations assessing a DSGE model with exogenous spending and various identified VARs suggest that failing to account for these feedbacks may induce a severe upward bias in estimated multipliers. JEL: C32, E62, H30. / KEY WORDS: Government Spending Multiplier, Endogenous Fiscal Policy, Structural Econometrics.

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