Fiscal Multipliers in Recessions and Expansions : Does It Matter Whether Government Spending Is Increasing or Decreasing?
Using non-linear methods, this paper finds that existing estimates of government spending multipliers in expansion and recession may yield biased results by ignoring whether government spending is increasing or decreasing. For industrial countries,...
| Main Authors: | , , |
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| Language: | English en_US |
| Published: |
World Bank Group, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2014/07/19898940/fiscal-multipliers-recessions-expansions-matter-whether-government-spending-increasing-or-decreasing http://hdl.handle.net/10986/19389 |
| Summary: | Using non-linear methods, this paper
finds that existing estimates of government spending
multipliers in expansion and recession may yield biased
results by ignoring whether government spending is
increasing or decreasing. For industrial countries, the
problem originates in the fact that, contrary to one's
priors, it is not always the case that government spending
is going up in recessions (i.e., acting countercyclically).
In almost as many cases, government spending is actually
going down (i.e., acting procyclically). Since the economy
does not respond symmetrically to government spending
increases or decreases, the "true" long-run
multiplier for bad times (and government spending going up)
turns out to be 2.3 compared to 1.3 if we just distinguish
between recession and expansion. In the case of developing
countries, the bias results from the fact that the
multiplier for recessions and government spending going down
(the "when-it-rains-it-pours" phenomenon) is
larger than when government spending is going up. |
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