Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/225029 
Year of Publication: 
2020
Series/Report no.: 
DIW Discussion Papers No. 1901
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
Abstract: 
We estimate the dynamic effects of government spending shocks, using time-varying volatility in US data modeled through a Markov switching process. We find that the average government spending multiplier is significantly and persistently above one, driven by a crowding-in of private consumption and non-residential investment. We rationalize the results empirically through a contemporaneously countercyclical response of government spending and an efficient weighting of observations inversely to their error variance. We then show that the multiplier is significantly smaller when volatility is high, consistent with theories predicting reduced effectiveness of fiscal interventions in uncertain times.
Subjects: 
fiscal policy
government spending multiplier
uncertainty
structural vector autoregressions
heteroskedasticity
JEL: 
C32
E62
H50
Document Type: 
Working Paper

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