The Nexus between Public Debt and the Government Spending Multiplier: Fiscal Adjustments Matter

IIBOSHI, Hirokuni and IWATA, Yasuharu (2023): The Nexus between Public Debt and the Government Spending Multiplier: Fiscal Adjustments Matter. Forthcoming in: the Oxford Bulletin of Economics and Statistics

Abstract

This paper studies the evolution of government spending multipliers in the post-war U.S. using a time-varying parameter VAR model. We achieve identification by imposing sign and zero restrictions on the systematic component of policy rules and impulse responses. Our results show that the U.S. multipliers in the post-OBRA93 period are smaller than those in the 1970s. The multipliers are found to be more strongly correlated with the estimated coefficients of the debt-stabilizing rule than the debt-to-GDP ratios. The increased magnitude of fiscal adjustments appears to be the major driving force behind the decline in multipliers rather than debt accumulation itself.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bayesian VARs; Time-varying parameters; Fiscal multipliers; Fiscal policy
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H6 - National Budget, Deficit, and Debt > H60 - General

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