DP7236 New Keynesian versus old Keynesian government spending multipliers

Author(s): John F. Cogan, Tobias Cwik, John B. Taylor, Volker Wieland
Publication Date: March 2009
Keyword(s): Fiscal Policy, Government Spending, Keynesian models, model uncertainty, Multiplier
JEL(s): C52, E62
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7236

Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modeling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically-estimated and widely-cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small just when needed most, and GDP and employment effects are only one-sixth as large, with private sector employment impacts likely to be even smaller.