Does the Government Spending Multiplier Depend on the Business Cycle?

Abstract

We investigate government spending multipliers using a two-regime model and impulse response functions with fully endogenous regimes. While short-run multipliers vary depending on business cycle fluctuations, we find little evidence that medium or long-run multipliers vary between expansions and recessions. The reason for state-dependence found in the literature is the constant-regime assumption used to create impulse response functions. Importantly, a fiscal policy shock has little effect on the duration of a recession. However, we find that recession multipliers for government investment, non-defense and state and local spending are higher than their government consumption, defense and federal spending counterparts.