We thank Morten Ravn as well as two anonymous referees for valuable comments and suggestions.
Withering Government Spending Multipliers
Article first published online: 18 DEC 2012
© 2012 The Ohio State University
Journal of Money, Credit and Banking
Volume 44, Issue Supplement s2, pages 185–210, December 2012
How to Cite
CANZONERI, M., COLLARD, F., DELLAS, H. and DIBA, B. (2012), Withering Government Spending Multipliers. Journal of Money, Credit and Banking, 44: 185–210. doi: 10.1111/j.1538-4616.2012.00557.x
- Issue published online: 18 DEC 2012
- Article first published online: 18 DEC 2012
- Received December 19, 2011; and accepted in revised form July 30, 2012.
- government spending multiplier;
- monetary policy;
- imperfect information
The empirical literature has documented a weakening of the consumption and output responses to an increase in government spending during the last 30 years. We show that a New Keynesian model in which real government spending is observed with measurement errors can account for the reduction in the size of government spending multipliers. The model implies—consistent with empirical evidence presented by Ilzetzki, Mendoza, and Vegh (2010)—that the evolution of monetary policy and greater globalization (increasing international trade and decreasing capital controls) are key factors in this development.