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On the decline in the magnitude of the expenditure multiplier

Published online by Cambridge University Press:  07 November 2023

Jesús Rodríguez-López  and
Mario Solis-Garcia Open the ORCID record for Mario Solis-Garcia [Opens in a new window]
Jesús Rodríguez-López
Affiliation:
Universidad Pablo de Olavide, Sevilla, Spain
Mario Solis-Garcia*
Affiliation:
Macalester College, St. Paul, MN, USA
*
Corresponding author: Mario Solis-Garcia; Email: msolisga@macalester.edu
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Abstract

We investigate the causes underlying the decline in the government expenditure multiplier after the Korean War, through the lens of a structural dynamic stochastic general equilibrium model. We estimate the model using Bayesian methods and annual frequency data from 1939 to 2017. The model replicates the observed fall in the expenditure multiplier. We find that the decline is accounted for by changes in two of the model’s structural parameters, namely a decline in consumption habit persistence and a higher autocorrelation of the public expenditure processes. These changes imply a stronger negative wealth effect, a lower discretion of US fiscal policy and, consequently, a multiplier of smaller magnitude. The model identifies the news shocks to military spending, yet fiscal news plays little role in the decline of the multiplier. Rather, the news shocks account for an important fraction of medium-term variances of debt and military expenditures, which justifies their inclusion in the model.

Keywords

Business cyclesmilitary expendituregovernment multipliers
Type
Articles
Information
Macroeconomic Dynamics , First View , pp. 1 - 33
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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Footnotes

†

We thank two anonymous referees who offered helpful comments and suggestions that greatly improved the paper. We also thank Gabriel Pérez-Quirós and J. Víctor Ríos-Rull, who guided us in the composition of this paper. Of course, all errors remain our own. We thank seminar participants at Macalester College, the 2017 Southern Economic Association meeting, and the 2017 Simposio de Análisis Económico. J. Rodríguez-López acknowledges financial support from MINECO (Spain) projects PID2019-107161GB-C33 (2020–2022) and PID2022-137352NB-C44 (2023–2025), Spanish Ministry of Science and Technology, and from Junta de Andalucía under project SEJ-1512.

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