Tuesday, August 9, 2011

A new IMF paper on multipliers

Have you ever wished that Romer and Romer's (2010) identification method for fiscal multipliers was expanded to multiple countries and incorporated both spending and tax policy? Well now you have it (HT - Bruce Bartlett). I've read the first several pages and skimmed the rest. This provides a great overview of the macroeconometric identification problems I was discussing earlier, and presents results for both the corrected and uncorrected estimates to demonstrate the endogeneity bias. The results? Fiscal contraction is contractionary and fiscal expansion is expansionary. Keep in mind, of course, that while this corrects for endogeneity bias it mushes together periods we would expect to be more and less expansionary. I can't get the picture to copy, but there's a nice illustration on page 13 of the extent of the bias.


  1. Nice - thanks. This is similar to approaches that consider tax changes to pay down debt exogenous. The motivator of the decision is decisions about the debt (or in this case a surplus fund) that were made long before current economic conditions, and therefore exogenous to current conditions.

    I need to look at this more closely, but one concern of course is whether it's making inter-state comparisons. States don't have independent monetary authorities. There's spillover, etc. That stuff impacts actual multipliers, but it also adds an estimation problem - you're estimating a state multiplier off of the difference between that state and other states its potentially spilling over into.

    State stuff is messy, but the attraction is of course that there's more data. I'll take a closer look at this - thanks Robert.

    Does anyone else know of any good solid multiplier studies - particularly those solving the endogeneity problem??


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