Wednesday, November 04, 2009

More on the multiplier

In a new NBER working paper (ungated version here) Valerie Ramey provides some new evidence on the effects of government spending on consumption and the size of the government spending multiplier:

"Do shocks to government spending raise or lower consumption and real wages? Standard VAR identification approaches show a rise in these variables, whereas the Ramey-Shapiro narrative identification approach finds a fall. I show that a key difference in the approaches is the timing. Both professional forecasts and the narrative approach shocks Granger-cause the VAR shocks, implying that the VAR shocks are missing the timing of the news. Simulations from a standard neoclassical model in which government spending is anticipated by several quarters demonstrate that VARs estimated with faulty timing can produce a rise in consumption even when it decreases in the model. Motivated by the importance of measuring anticipations, I construct two new variables that measure anticipations. The first is based on narrative evidence that is much richer than the Ramey-Shapiro military dates and covers 1939 to 2008. The second is from the Survey of Professional Forecasters, and covers the period 1969 to 2008. All news measures suggest that most components of consumption fall after a positive shock to government spending. The implied government spending multipliers range from 0.6 to 1.1. "

Shout it from the rooftops!


Doc Merlin said...

Yah, government spending crowds out private spending.


Boonton said...

So you have a multiplier of 0.6-1.1 when the stimulus is anticipated for several quarters and a standard neoclassical model is assumed to be an accurate depiction of reality.

If the depression takes people by surprise and if the neoclassical model ain't so hot then you would probably have a multiplier that's bigger than 0.6-1.1.

DW said...

This would be interesting if it were at all relevant to our current situation. But it's not.

We all know and expect government spending to crowd out consumption when the economy is at full employment. But we have no reason to expect the same results when we are in a liquidity trap.

This is silly.

Juegos de Ben 10 said...

Booton thats right !

buy generic viagra said...

I think there are some important points of view to be considered here, because we have to be careful with these topics, on the other hand I learned a lot with it.