This paper investigates the impact of government spending on output and the size of the spending multiplier during periods of output contraction vs. expansion. It also investigates the impact of spending when the economy hits the nominal zero lower bound. It uses a panel of 21 advanced countries over the period of 1979-2011, applying a TSLS estimation technique. We find a spending multiplier of close to 1 during expansion and values of up to 3 during contractions. However, our results do not indicate a difference in the impact of spending during nominal zero lower bound periods.
Keywords: Fiscal multiplier, fiscal policy, panel analysis, output contraction
JEL classification: C36: Multiple or Simultaneous Equation Models: Instrumental Variables (IV) Estimation E62: Fiscal Policy
Download: Working Paper PKWP1404