Withering Government Spending Multipliers |
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| Authors: | MATTHEW CANZONERI FABRICE COLLARD HARRIS DELLAS BEHZAD DIBA |
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| Institution: | Matthew Canzoneri is Professor of Economics, Georgetown University (E‐mail: canzonem@georgetown.edu). Fabrice Collard is Professor of Economics, University of Bern (E‐mail: fabrice.collard@gmail.com). Harris Dellas is Professor of Economics, University of Bern (E‐mail: harris.dellas@vwi.unibe.ch). Behzad Diba is Professor of Economics, Georgetown University (E‐mail: dibab@georgetown.edu). |
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| Abstract: | The empirical literature has documented a weakening of the consumption and output responses to an increase in government spending during the last 30 years. We show that a New Keynesian model in which real government spending is observed with measurement errors can account for the reduction in the size of government spending multipliers. The model implies—consistent with empirical evidence presented by Ilzetzki, Mendoza, and Vegh (2010)—that the evolution of monetary policy and greater globalization (increasing international trade and decreasing capital controls) are key factors in this development. |
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| Keywords: | E32 E62 F39 government spending multiplier monetary policy openness imperfect information |
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