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Government Spending Between Active and Passive Monetary Policy: An Invariance Result

  • Sebastian Laumer EMAIL logo and Collin Philipps
Published/Copyright: April 3, 2024
The B.E. Journal of Macroeconomics
From the journal The B.E. Journal of Macroeconomics Volume 24 Issue 1

Abstract

This paper develops a new approach to analyze the relationship between the government spending multiplier and monetary policy. We embed measures of monetary policy activism into a nonlinear SVAR model. Our model allows the central bank to adjust its monetary policy regime in response to the economic conditions that arise after government spending shocks. We find that, regardless of the monetary policy regime at the time of a spending shock, the central bank adjusts its regime quickly and responds actively towards inflation only a few quarters after the shock hits the economy. This rapid response of monetary policy leaves medium-run multipliers ultimately unaffected by whether the initial regime was active or passive. For both initial regimes, our five-year multiplier estimates lie between 1.2 and 1.5. An apparent exception to this result is the zero lower bound period between 2008Q4 and 2015Q4-during which monetary policy kept nominal interest rates at zero. Our multiplier point estimates for that era are consistently larger than unity.

Keywords: fiscal multiplier; nonlinear SVAR; monetary policy
JEL Classification: C32; E32; E62
Corresponding author: Sebastian Laumer, University of North Carolina, Greensboro, 516 Stirling St, Greensboro, NC 27412, USA, E-mail:

We thank the editor and two anonymous referees for their guidance. We also thank Pooyan Amir Ahmadi, Dan Bernhardt, Greg Howard, Stefan Krasa, Minchul Shin, and Dejanir Silva for their comments. We are also grateful to Diogo Baerlocher, Nadav Ben Zeev, Fabio Canova, Gustavo Cortes, John Francois, Tim Moreland, Aeimit Lakdawala, Stephen Parente, Ken Rich, Matt Schaffer, Shihan Xie, and Haroon Mumtaz for their valuable feedback. Finally, we thank seminar participants at various venues for helpful discussions.

The views expressed in this article, book, or presentation are those of the author and do not necessarily reflect the official policy or position of the United States Air Force Academy, the Air Force, the Department of Defense, or the U.S. Government. PA#: USAFA-DF-2022-485.

  1. Competing interests: None.

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Supplementary Material

This article contains supplementary material (https://doi.org/10.1515/bejm-2024-0022).

Received: 2023-09-26
Accepted: 2024-02-25
Published Online: 2024-04-03

© 2024 Walter de Gruyter GmbH, Berlin/Boston

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  18. Government Spending Between Active and Passive Monetary Policy: An Invariance Result
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https://doi.org/10.1515/bejm-2024-0022
Keywords for this article
fiscal multiplier; nonlinear SVAR; monetary policy

Articles in the same Issue

  1. Frontmatter
  2. Advances
  3. Optimal Taxation of Informal Firms: Misreporting Costs and a Tax Reform in Brazil
  4. Initial Beliefs Uncertainty
  5. Credit Resource Misallocation and Macroeconomic Fluctuations in China: From the Perspective of Heterogeneous Financial Frictions
  6. The Bitcoin Premium: A Persistent Puzzle
  7. Contributions
  8. Intermediate Goods–Skill Complementarity
  9. Perfect Competition and Fixed Costs: The Role of the Ownership Structure
  10. Optimal Monetary Policy with Government-Provided Unemployment Benefits
  11. Employment Protection in Dual Labor Markets: Any Amplification of Macroeconomic Shocks?
  12. A Tide that Lifts Some Boats: Assessing the Macroeconomic Effects of EU Enlargement
  13. Current Account Balances’ Divergence in the Euro Area: An Appraisal of the Underlying Forces
  14. Merging Structural and Reduced-Form Models for Forecasting
  15. Trust in Government in a Changing World: Shocks, Tax Evasion, and Economic Growth
  16. The Fiscal Multiplier of Public Investment: The Role of Corporate Balance Sheet
  17. Does Uncertainty Matter for the Fiscal Consolidation and Investment Nexus?
  18. Government Spending Between Active and Passive Monetary Policy: An Invariance Result
  19. A DSGE Model with Government-owned Banks
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