Abstract

What determines government spending multipliers? While monetary policy and public debt have long been considered as important factors in determining the effects of fiscal policy, recent debate on multipliers in the post-war U.S. focuses on their state-dependent nature across the business cycle. This paper attempts to fill the gap by providing new empirical evidence from time-varying parameter vector autoregressive (TVP-VAR) model that includes monetary variables and public debt with sign restrictions. The results show that government spending multipliers declined substantially since the late 1970s. To examine the cause of the decline, government spending shocks in different scenarios are identified by imposing additional restrictions. The decline is also observed for those in recession and expansion. Contrary to conventional wisdom, monetary policy is shown to play little role in the decline. Applying the TVP-VAR technique for the testing of changes in fiscal policy stance, we find that the degree of Ricardian behavior of the government were strengthened over the period during which multipliers declined. Our results point to the importance of fiscal behavior that the public debt level may affect.