DP15330 Should we trust cross sectional multiplier estimates?

Author(s): Fabio Canova
Publication Date: October 2020
Date Revised: October 2020
Keyword(s): Cross sectional methods, dynamic heterogeneity, fiscal multipliers, Monetary pass-through, partial pooling
JEL(s): E0, H6, H7
Programme Areas: Public Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15330

I examine the properties of cross sectional estimates of multipliers, elasticities, or pass-throughs when the data is generated by a conventional multi-unit time series specification. A number of important biases plague estimates; the most relevant one occurs when the cross section is not dynamic homogenous. I suggest methods that can deal with this problem and show the magnitude of the biases cross sectional estimators display in an experimental setting. I contrast average time series and average cross sectional estimates of local fiscal multipliers for US states.