Government Spending Multipliers: The Size of the Fiscal Shock Matters

Abstract:
Do all types of government spending generate similar multiplier effects? A standard non-linear DSGE model predicts that both government consumption and government investment multipliers are much smaller than one in the short run. I test those predictions on US data using Structural Vector Auto Regression (SVAR) and Local Projections (LP) methods. In order to estimate multipliers accurately, I isolate unanticipated changes in government spending. For transitory spending shocks, I find that the government investment multiplier is larger than one in the short run, and the government consumption multiplier is near zero. I explore a few possible reasons for this difference. First, private investment gets crowded out substantially after a government consumption shock but not after a government investment shock. Second, linear and symmetric regression methods fail to capture the non-linear and asymmetric effects of consumption shocks, leading to an underestimation of the consumption multiplier. I also find evidence that additional spending by state and local governments is more effective in raising output than that by the federal government. This finding is related to the non-linear effects of consumption shocks.

Federal Stimulus & Missing Payments: Insights from a Heterogeneous Agents Model

Abstract:
When the US federal government undertakes a stimulus program, most eligible individuals receive their stimulus checks, but some miss their payments. Evidence suggests such occurrences are non-random and mostly concentrated at the bottom of the asset distribution. I use an economic model with a lump-sum tax-transfer system to study the effects of missing payments. If the unused funds are not returned to taxpayers or are delayed, missing payments can lower aggregate consumption, savings, and output in the short run. However, I show that if the tax refunds are processed sooner, missing payments do not reduce output in the short run. Rather, the positive effect on output gets stronger in the medium run than when all recipients get their payments. Since taxpayers are wealthier than those who miss payments and have a higher marginal propensity to save (MPS), they save a higher share of the total tax refunds. As a result, aggregate savings will increase and eventually translate into higher capital stock and output.

Publications

Ervin, D. E., Breshears, E. H., Frisvold, G. B., Hurley, T., Dentzman, K. E., Gunsolus, J. L., Jussaume, R. A., Owen, M. D. K., Norsworthy, J. K., Al Mamun, M. M., & Everman, W. (2019). Farmer Attitudes Toward Cooperative Approaches to Herbicide Resistance Management: A Common Pool Ecosystem Service Challenge. Ecological Economics, 157, 237–245. https://doi.org/10.1016/j.ecolecon.2018.11.023 ‌

Mohiuddin, Hossain and Bhuiya, Md Musfiqur Rahman and Mamun, Mustofa Mahmud Al, An Analysis of the Temperature Change of Dhaka City (September 14, 2014). Proceedings of 5th International Conference on Environmental Aspects of Bangladesh, ICEAB 2014 , Available at SSRN: https://ssrn.com/abstract=3522186