DP10584 Stimulus versus Austerity: The Asymmetric Government Spending Multiplier

Author(s): Régis Barnichon, Christian Matthes
Publication Date: May 2015
Keyword(s): fiscal policy, Gaussian Mixture Approximation
JEL(s): C32, E62
Programme Areas: International Macroeconomics, Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10584

Despite intense scrutiny estimates of the government spending multiplier remain highly uncertain with values ranging from 0.5 to 2. While a fiscal consolidation is generally assumed to have the same (mirror-image) effect as a fiscal expansion, we show that relaxing this assumption is crucial to understanding the effects of fiscal policy. The government spending multiplier is substantially below 1 for fiscal expansions, but the multiplier is substantially above 1 for fiscal consolidations.