Becker Friedman Institute

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Clearing Up the Fiscal Multiplier Morass

Bayesian prior predictive analysis of five nested DSGE models suggests that model specifications and prior distributions tightly circumscribe the range of possible government spending multipliers. Multipliers are decomposed into wealth and substitution effects, yielding uniform comparisons across models. By constraining the multiplier to tight ranges, model and prior selections bias results, revealing less about fiscal effects in data than about the lenses through which researchers choose to interpret data. When monetary policy actively targets inflation, output multipliers can exceed one, but investment multipliers are likely to be negative. Passive monetary policy produces consistently strong multipliers for output, consumption, and investment.

Authors: 
Eric Leeper, Indiana University
Nora Traum, North Carolina State University
Todd B. Walker, Indiana University
Publication Date: 
September, 2011
BFI Initiative: 
Publication Status: