The Government Spending Multiplier at the Zero Lower Bound: Evidence from the United States
| Author | Emanuel Gasteiger,Mario Di Serio,Matteo Fragetta |
| DOI | http://doi.org/10.1111/obes.12382 |
| Published date | 01 December 2021 |
| Date | 01 December 2021 |
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©2020 TheAuthors. OxfordBulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd.
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OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 82, 6 (2020) 0305–9049
doi: 10.1111/obes.12382
The Government Spending Multiplier at the Zero
Lower Bound: Evidence from the United States*
Mario Di Serio,†Matteo Fragetta†,‡,§ and Emanuel
Gasteiger‡,¶
†Department of Economics and Statistics, Universit´a degli Studi di Salerno, Via Ponte Don
Melillo, 84084 Fisciano (SA), Italy (e-mail: mdiserio@unisa.it)
‡Instituto Universit´ario de Lisboa (ISCTE-IUL), Business Research Unit (BRU-IUL), Av.a
das For¸cas Armadas 1649-026,Lisboa, Portugal
§Centro di Economia del Lavoro e di Politica Economica, CELPE, Universit`a degli Studi
di Salerno, Italy
¶Institute of Statistics and Mathematical Methods in Economics, TU Wien, Wiedner
Hauptstr. 8-10 1040,Wien, Austria (e-mail: emanuel.gasteiger@tuwien.ac.at)
Abstract
We estimate state-dependent government spending multipliers for the United States. We
use a factor-augmented interacted vector autoregression (FAIVAR) model. This allows us
to capture the time-varying monetary policy characteristics including the recent zero in-
terest rate lower bound (ZLB) state, to account for the state of the business cycle and to
address the limited information problem typically inherent in VARs. We identify govern-
ment spending shocks by sign restrictions and use a government spending growth forecast
series to account for the effects of anticipated fiscal policy. In our baseline specification,
we find that government spending multipliers in a recession range from 3.56 to 3.79 at
the ZLB. Away from the ZLB, multipliers in recessions range from 2.31 to 3.05. Several
robustness analyses confirm that multipliers are higher, when the interest rate is lower and
that multipliers in recessions exceed multipliers in expansions. Our results are consistent
with theories that predict larger multipliers at the ZLB.
I. Introduction
How large is the government spending multiplier in normal times and how large is it
when monetary policy is constrained by the zero interest rate lower bound (ZLB)? The
JEL Classification numbers: C32, E21, E32, E52, E62, H50
*We are grateful to the editor Francesco Zanetti, three anonymous referees, Efrem Castelnuovo, Lutz Kilian,
Matthias Klein, our discussant Massimiliano Pisani and the participants of the 5th SIdE Workshopfor PhD students
in Econometrics and Empirical Economics organized by the Italian Econometric Association and Bank of Italy,the
Vereinf ¨ur SocialpolitikAnnual Conference 2017 for many helpful comments. Financial support from Funda¸c˜aopara
aCiˆencia e a Tecnologia (UIDB/00315/2020) and the Berlin Economics Research Associates (BERA) programme is
gratefully acknowledged. All remaining errors are the responsibility of the authors.
Spending Multiplier at the ZLB 1263
Great Recession has revived the debate regarding this question among policy circles and
in academia as it is of high practical relevance. If fiscal stimulus by means of an increase
in government spending raises real GDP by more than one-for-one that is each dollar of
the government spending increase raises real GDP by more than one dollar, then such a
stimulus is highly desirable from a policymaking perspective.
The recent debate has given particular attention to the fact that since the outbreak of the
2008 financial crisis the Fed’s monetary policy was accommodative, or even constrained
by the ZLB. It is worthwhile that the accommodative stance also included unconventional
monetary policy.1Figure1 illustrates monetar y and fiscal policy from 1960Q1 to 2015Q4.
The key observation regarding the most recent recession is that the Federal Funds Rate
was abruptly cut to near zero and has remained there until 2015Q4. Moreover, there has
been a dramatic increase in government expenditures at the beginning of this period. This
policy can be rationalized by arguing that in such an extraordinary situation as the ZLB,
an increase in government spending is more effective than in normal times.2
A growing theoretical literature examines this claim. There is an increasing number of
New Keynesian DSGE models that generates predictions consistent with this claim. See,
for instance Christiano, Eichenbaum and Rebelo (2011), Eggertsson (2010), Woodford
(2011), Davig and Leeper (2011) or Coenen et al. (2012). These models predict a govern-
ment spending multiplier at the ZLB much larger than one. Likewise, there is an emerging
literature developing reasonable theories that suggest that the government spending multi-
plier at the ZLB is one or below, and lower than in times without the ZLB binding. See, for
instance Boneva, Braun and Waki (2016), Mertens and Ravn (2014), Aruoba, Cuba-Borda
and Schorfheide (2018).
Given the wide range of theoretical predictions for the size of the government spending
multiplier at the ZLB, empirical evidence is a crucial need for policymakers and academia.3
However, the empirical literature providing state-dependent evidence on the size of the ag-
gregate government spending multiplier at the ZLB is still in its infancy. To date, Ramey
and Zubairy (2018) is the single paper for the United States in this literature according to
our knowledge.4Ramey and Zubairy (2018) use the local projection method developed by
Jord`a (2005) and find that the government spending multiplier at the ZLB can be as large
as 1.5 in some specifications.5Moreover, there is a related, but distinct empirical litera-
ture quantifying state-dependent fiscal multipliers in recessions and expansions based on
regime-switching VAR (see, e.g. Auerbach and Gorodnichenko, 2012, 2013), local pro-
1For instance, the Fed announced three rounds of quantitativeeasing: in November 2008, in November 2010 and
in September 2012.
2Consistent with the idea that fiscal multipliers are different at the ZLB, several studies find changes in macroe-
conomic performance at the ZLB (see, e.g. Liu et al., 2019).
3Christiano et al. (2011 p. 81) argue: ‘The simple models discussed above suggest that the multiplier can be large
in the zero-bound state. The obvious next step would be to use reduced-form methods, such as identifiedVARs, to
estimate the government-spending multiplier when the zero bound binds’.
4Crafts and Mills (2013) and Ramey (2011b) provide evidence for ZLB episodes suggesting multipliers below
unity.
5Miyamoto et al. (2018) build on the methods used in Ramey and Zubairy (2018) and provide evidence for Japan.
They find that the impact multiplier is around 1.5 at the ZLB and much larger than awayfrom the ZLB. More recently,
Amendola et al. (2019) build on the ideas and methods in our paper and estimate a panel version of our model for
the Euro Area.Their findings are consistent with our findings.
©2020 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and JohnWiley & Sons Ltd.
1264 Bulletin
Figure 1. Monetary and fiscal policy, 1960Q1 to 2015Q4.The shaded areas indicate recessions according to
NBER
jection (see, e.g. Ghassibe and Zanetti, 2020) or structural vector moving-average models
(see, e.g. Barnichon, Debortoli and Matthes, 2019). However, as Figure 1 illustrates, re-
cessions and episodes where the Federal Funds Rate is at zero or below do not necessarily
coincide. Thus, there is a need for more evidence on the government spending multiplier
at the ZLB.
The objective of this paper is to provide further state-dependent evidence on the size of
the government spending multiplier at the ZLB from the United States. We extend the lit-
erature by proposing an alternative frameworkto quantify the state-dependent government
spending multiplier.To this end, we use factor-augmented interacted vector autoregressive
model with exogenous variables (FAIVAR-X) building on the interacted vector autore-
©2020 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and JohnWiley & Sons Ltd.
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