The Young, the Old, and the Government: Demographics and Fiscal Multipliers

2021 ◽  
Vol 13 (4) ◽  
pp. 110-141
Author(s):  
Henrique S. Basso ◽  
Omar Rachedi
Keyword(s):  
Open Economy ◽  
Government Spending ◽  
Population Aging ◽  
Supply And Demand ◽  
New Keynesian ◽  
Fiscal Multipliers ◽  
Keynesian Model ◽  
The Us ◽  
The Government ◽  
Labor Supply And Demand

We document that government spending multipliers depend on the population age structure. Using the variation in military spending and birth rates across US states, we show that the local fiscal multiplier is 1.5 and increases with the population share of young people, implying multipliers of 1.1–1.9 in the interquartile range. A parsimonious life cycle open economy New Keynesian model with credit market imperfections and age-specific differences in labor supply and demand explains 87 percent of the relationship between local multipliers and demographics. The model implies that the US population aging between 1980 and 2015 caused a 38 percent drop in national government spending multipliers. (JEL D15, E12, E24, E62, J11, J22, J23)

HOW CAN THE GOVERNMENT SPENDING MULTIPLIER BE SMALL AT THE ZERO LOWER BOUND?

2018 ◽  
Vol 23 (8) ◽  
pp. 3457-3482 ◽  
Author(s):  
Valerio Ercolani ◽  
João Valle e Azevedo
Keyword(s):  
Interest Rate ◽  
Government Spending ◽  
New Keynesian ◽  
Nominal Interest Rate ◽  
Size Of Government ◽  
Large Size ◽  
Keynesian Model ◽  
Recent Estimate ◽  
The Government ◽  
Relationship Of

Some recent empirical evidence questions the typically large size of government spending multipliers when the nominal interest rate is stuck at zero, finding output multipliers of around 1 or even lower, with an upper bound of around 1.5 in some circumstances. In this paper, we use a recent estimate of the degree of substitutability between private and government consumption in an otherwise standard New Keynesian model to show that this channel significantly reduces the size of government spending multipliers obtained when the nominal interest rate is at zero. All else being equal, the relationship of substitutability makes a government spending shock crowd out private consumption while being less inflationary, thus, limiting the typically expansionary effect of the fall in the real interest rate. Subject to the nominal interest rate being constrained at zero, the model generates output multipliers ranging from 0.8 to 1.6.

scholarly journals Post-2008 Brazilian fiscal policy: an interpretation through the analysis of fiscal multipliers

2017 ◽  
Vol 47 (1) ◽  
pp. 93-124
Author(s):  
Celso José Costa Junior ◽  
Alejandro C. García Cintado ◽  
Armando Vaz Sampaio
Keyword(s):  
Fiscal Policy ◽  
Open Economy ◽  
Public Investment ◽  
Aggregate Demand ◽  
Small Open Economy ◽  
New Keynesian ◽  
Fiscal Policies ◽  
Fiscal Multipliers ◽  
Brazilian Government ◽  
The Government

Abstract The global crisis that erupted in 2007 led many countries to embark on countercyclical fiscal policies as a way to cushion the blow of a depressed aggregate demand. Advocates of discretionary measures emphasize that fiscal policy can indeed stimulate the economy. The main goal of this work is to assess whether the fiscal policies pursued by the Brazilian government in the aftermath of the 2008 crisis, succeeded in bringing the economy back on track in a sustainable fashion. To this end, the fiscal multipliers of five different shocks are studied in a small open-economy New Keynesian framework. Our results point to the government spending and public investment as the most effective fiscal tools for combating the crisis. However, the highest fiscal multiplier turned out to be the one associated with excise tax reductions.

Optimal Inflation for the US Economy

2011 ◽  
Vol 3 (3) ◽  
pp. 29-52 ◽  
Author(s):  
Roberto M Billi
Keyword(s):  
Inflation Rate ◽  
Low Cost ◽  
Policy Instrument ◽  
New Keynesian ◽  
Worst Case ◽  
Us Economy ◽  
Keynesian Model ◽  
Long Run ◽  
The Us ◽  
The Government

This paper studies the optimal long-run inflation rate (OIR) in a small New Keynesian model, where the only policy instrument is a short-term nominal interest rate that may occasionally run against a zero lower bound (ZLB). The model allows for worst-case scenarios of misspecification. The analysis shows first, if the government optimally commits, the OIR is below 1 percent annually. Second, if the government re-optimizes each period, the OIR rises markedly to 17 percent. Third, if the government commits only to an inertial Taylor rule, the inflation bias is eliminated at very low cost in terms of welfare for the representative household. (JEL E12, E31, E43, E52, E58)

ON PHASE SHIFTS IN A NEW KEYNESIAN MODEL ECONOMY

2020 ◽  
pp. 1-22
Author(s):  
Xue Li ◽  
Joseph H. Haslag
Keyword(s):  
Phase Shift ◽  
Government Spending ◽  
Inflation Rate ◽  
Price Level ◽  
New Keynesian ◽  
Price Stickiness ◽  
Keynesian Model ◽  
The Government ◽  
The One ◽  
Identification Mechanism

The purpose of this paper is to focus directly on the phase shift. For one thing, we ask whether a New Keynesian sticky-price model economy can account for both countercyclical prices and procyclical inflation. We present findings in which the price level is countercyclical and the inflation rate is procyclical. We proceed to use the model economy as an identification mechanism. What set of individual shocks are necessary to account for the phase shift? That set contains the price markup shock. Next, we ask what set of shocks are sufficient to account for the phase shift. This set contains three elements: the price markup and wage markup shocks along with the government spending shock. The results are important as a building block. We infer that price stickiness is an important model feature; without price stickiness, we are in the real business cycle economies that Cooley and Hansen studied. But, it raises further questions. For instance, is price stickiness of the Calvo form—the one used here—necessary to explain the phase shift?

FISCAL MULTIPLIERS AT THE ZERO LOWER BOUND: THE ROLE OF GOVERNMENT SPENDING PERSISTENCE

2019 ◽  
pp. 1-28 ◽  
Author(s):  
Phuong V. Ngo
Keyword(s):  
Lower Bound ◽  
Government Spending ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Role Of Government ◽  
Fiscal Multipliers ◽  
The Great Recession ◽  
Resource Cost ◽  
The Government

In this paper, I examine the role of government spending persistence on fiscal multipliers at the zero lower bound (ZLB) in a more realistic environment while keeping the model simple enough to identify mechanisms driving the result. In particular, I build on a standard dynamic New Keynesian (DNK) model with an occasionally binding ZLB and Rotemberg pricing with rebates, where the probability of hitting the ZLB and the government purchase shock are in line with US data. Moreover, I compute the multiplier in a state that mimics the Great Recession. The main findings of the paper are as follows: (1) the multiplier is non-monotonic in the persistence of government spending while the economy is at the ZLB; (2) given the persistence estimated from US data, the multiplier is 1.25; and (3) in the framework with perfect foresight or with aggregate resource cost for adjusting prices, the multiplier is around 1 or less.

Cyclical Government Spending : Theory and Empirics

2021 ◽  
Author(s):  
Jordan Roulleau-Pasdeloup
Keyword(s):  
Open Economy ◽  
Government Spending ◽  
Cumulative Effect ◽  
State Level ◽  
New Keynesian ◽  
Keynesian Model ◽  
Long Run ◽  
Level Data ◽  
Multiplier Effect ◽  
Systematic Component

Abstract This paper shows that part of what is usually labelled discretionary government spending actually varies systematically over the cycle. I exploit the pervasive gap between OLS and 2SLS local government spending multipliers to estimate how cyclical the systematic part of government spending is. Estimating a structural open economy New Keynesian model on U.S. state level data, I find that when employment decreases by $1\%$, the systematic component of government spending decreases by $0.23\%$. I also find that the empirical specification in Nakamura & Steinsson (2014) does a good job in recovering the true impact multiplier effect, but that it overestimates the long-run cumulative effect.

scholarly journals Resolving New Keynesian Anomalies with Wealth in the Utility Function

2019 ◽  
pp. 1-46 ◽  
Author(s):  
Pascal Michaillat ◽  
Emmanuel Saez
Keyword(s):  
Lower Bound ◽  
Utility Function ◽  
Social Status ◽  
Government Spending ◽  
Marginal Utility ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Forward Guidance ◽  
Keynesian Model ◽  
Low Levels

At the zero lower bound, the New Keynesian model predicts that output and inflation collapse to implausibly low levels, and that government spending and forward guidance have implausibly large effects. To resolve these anomalies, we introduce wealth into the utility function; the justification is that wealth is a marker of social status, and people value status. Since people partly save to accrue social status, the Euler equation is modified. As a result, when the marginal utility of wealth is sufficiently large, the dynamical system representing the zero-lower-bound equilibrium transforms from a saddle to a source—which resolves all the anomalies.

scholarly journals Industry Evidence on the Effects of Government Spending

2011 ◽  
Vol 3 (1) ◽  
pp. 36-59 ◽  
Author(s):  
Christopher J Nekarda ◽  
Valerie A Ramey
Keyword(s):  
Government Spending ◽  
Returns To Scale ◽  
Transmission Mechanism ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Neoclassical Model ◽  
Government Purchases ◽  
Keynesian Model ◽  
Constant Returns To Scale ◽  
Shed Light

This paper investigates the effects of government purchases at the industry level in order to shed light on the transmission mechanism for government spending on the aggregate economy. We create a new panel dataset that matches output and labor variables to industry-specific shifts in government demand. An increase in government demand raises output and hours, lowers real product wages and labor productivity, and has no effect on the markup. The estimates also imply approximately constant returns to scale. The findings are more consistent with the effects of government spending in the neoclassical model than the textbook New Keynesian model. (JEL E12, E23, E62, H50)

scholarly journals HAS GLOBALIZATION TRANSFORMED U.S. MACROECONOMIC DYNAMICS?

2012 ◽  
Vol 16 (2) ◽  
pp. 204-229 ◽  
Author(s):  
Fabio Milani
Keyword(s):  
Open Economy ◽  
Phillips Curve ◽  
New Keynesian ◽  
Time Varying ◽  
Closed Economy ◽  
Monetary Policy Shocks ◽  
Macroeconomic Dynamics ◽  
Keynesian Model ◽  
Policy Shocks ◽  
Openness To Trade

This paper estimates a structural New Keynesian model to test whether globalization has changed the behavior of U.S. macroeconomic variables. Several key coefficients in the model–such as the slopes of the Phillips and IS curves, the sensitivities of domestic inflation and output to “global” output, and so forth–are allowed in the estimation to depend on the extent of globalization (modeled as the changing degree of openness to trade of the economy), and, therefore, they become time-varying. The empirical results indicate that globalization can explain only a small part of the reduction in the slope of the Phillips curve. The sensitivity of U.S. inflation to global measures of output may have increased over the sample, but it remains very small. The changes in the IS curve caused by globalization are similarly modest. Globalization does not seem to have led to an attenuation in the effects of monetary policy shocks. The nested closed-economy specification still appears to provide a substantially better fit of U.S. data than various open-economy specifications with time-varying degrees of openness. Some time variation in the model coefficients over the postwar sample exists, particularly in the volatilities of the shocks, but it is unlikely to be related to globalization.

scholarly journals ECONOMIC CONSEQUENCES OF POPULATION AGING IN JAPAN: EFFECTS THROUGH CHANGES IN DEMAND STRUCTURE

2018 ◽  
pp. 1-23 ◽  
Author(s):  
MITSURU KATAGIRI
Keyword(s):  
Population Aging ◽  
Job Creation ◽  
Economic Consequences ◽  
New Keynesian ◽  
Japanese Economy ◽  
Unemployment Rates ◽  
Real Gdp ◽  
Keynesian Model ◽  
Demand Structure ◽  
Point Increase

In this paper, I investigate the effects of changes in demand structure caused by population aging on the Japanese economy using a multi-sector new Keynesian model with job creation/destruction analysis. I consider upward revisions in forecast for the speed of Japanese population aging as unexpected shocks to its demand structure. I find that the shocks caused around 0.3% point deflationary pressure on year-to-year inflation, 0.3% to 0.4% point increase in unemployment rates, and 1.8% point decrease in real GDP from the early 1990s to the 2000s in Japan. I also find that the repetition of such upward revisions made those effects look more persistent.

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