Government spending multipliers in contraction and expansion

By Walid Qazizada, Engelbert Stockhammer

PKES Working Paper 1404

May 2014

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 E62