Are Government Spending Multipliers Greater During Periods of Slack?

The embarrassing result here is that no, it seems they are not:

A key question that has arisen during recent debates is whether government spending multipliers are larger during times when resources are idle. This paper seeks to shed light on this question by analyzing new quarterly historical data covering multiple large wars and depressions in the U.S. and Canada. Using an extension of Ramey’s (2011) military news series and Jordà’s (2005) method for estimating impulse responses, we find no evidence that multipliers are greater during periods of high unemployment in the U.S. In every case, the estimated multipliers are below unity. We do find some evidence of higher multipliers during periods of slack in Canada, with some multipliers above unity.

That is from a new paper by Michael T. Owyang, Valerie A. Ramey, and Sarah Zubairy.

I see a few views (among others) of the multiplier:

1. The crude form of Say’s Law is true and fiscal policy simply remixes funds with no real impact.

2. Say’s Law is not really true as stated, but why should we be so impressed with a one-time uptick in monetary velocity, also called fiscal policy, unless the supply-side effects are also really good?

3. Fiscal policy effectively targets and mobilizes unemployed resources.

4. Fiscal policy postpones adjustment issues (this can be from AD too, it doesn’t have to be a “structural” problem), and may usefully smooth consumption, but it doesn’t do a good job targeting and mobilizing unemployed resources.

5. The size of the multiplier is determined by the expected monetary policy accommodation, and not by the quantity of unemployed resources.

I would say this paper provides evidence against #1 and #3.


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