Abstract

INVESTIGATING GOVERNMENT SPENDING MULTIPLIER FOR THE US ECONOMY: EMPIRICAL EVIDENCE USING A TRIPLE LASSO APPROACH


Zacharias Bragoudakis
Bank of Greece and National and Kapodistrian University of Athens

Dimitrios Panas
Tilburg University and Systemic RM


Abstract

An essential dilemma in economics that has yielded ambiguous answers is whether governments should spend more in recessions. This paper provides an extension of the work of Ramey & Zubairy (2018) for the US economy according to which the government spending multipliers are below unity, especially when the economy experiences severe slack. Nonetheless, their work suffered from some limitations with respect to invertibility and weak instrument problem.  

The contribution of this paper is twofold: Firstly, it provides evidence that a triple lasso approach for the lag selection is a useful tool in removing the invertibility issues and the weak instrument problem. Secondly, the main results using a triple lasso approach suggest multipliers below unity for most cases with no evidence for differences between different states of the economy. Nevertheless, re-running the code in Ramey & Zubairy (2018), the case where WWII is excluded exhibits multipliers above unity, in both the military news and Blanchard-Perotti specifications, contradicting their baseline findings and providing evidence for a more effective government spending in recessions.

 

Keywords: government spending, fiscal multipliers, debiased machine learning, triple lasso

 

JEL-Classification: C52, E62, H50, N42

 

Acknowledgements: The authors would like to thank S. Anyfantaki, H. Balfoussia, J. Joyce and G. Tavlas for helpful comments and suggestions. The paper has also benefited from the comments of the participants of the 25th International Conference on Macroeconomic Analysis and International Finance (ICMAIF) organized by the Department of Economics of the University of Crete in Rethymno, 29-31 July 2021. The views expressed do not necessarily reflect those of the Bank of Greece.

 

Correspondence:
Zacharias Bragoudakis
Economic Analysis and Research Department
Bank of Greece
21 El. Venizelos Av., 10250 Athens, Greece
Tel.:0030-210-3203605
Email: zbragoudakis@bankofgreece.gr

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