Discussion Paper

Models of government expenditure multipliers

Abstract: In this note, we demonstrate and analyze the inability of standard neoclassical models to generate accurate estimates of the fiscal multiplier (that is, the macroeconomic response to increased government spending). We then examine whether estimates can be improved by incorporating recently developed theory on demand-induced productivity increases into neoclassical models. We find that neoclassical models modified in this fashion produce considerably better estimates, but they remain unable to generate anything close to an accurate value of the fiscal multiplier.

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Economic Policy Paper

Publication Date: 2012

Number: 12-2