DP7236 New Keynesian versus old Keynesian government spending multipliers

Author(s): John F. Cogan , Tobias Cwik , John B. Taylor , Volker Wieland

Publication Date: March 2009

Keyword(s): Fiscal Policy , Government Spending , Keynesian models , model uncertainty , Multiplier

JEL(s): C52 , E62

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP7236.asp.asp

Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modeling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically-estimated and widely-cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small just when needed most, and GDP and employment effects are only one-sixth as large, with private sector employment impacts likely to be even smaller.