(Not) Dancing Together: Monetary Policy Stance and the Government Spending Multiplier

By Vincent Belinga, Constant A Lonkeng Ngouana

May 27, 2015

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Vincent Belinga, and Constant A Lonkeng Ngouana. (Not) Dancing Together: Monetary Policy Stance and the Government Spending Multiplier, (USA: International Monetary Fund, 2015) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper provides estimates of the government spending multiplier over the monetary policy cycle. We identify government spending shocks as forecast errors of the growth rate of government spending from the Survey of Professional Forecasters (SPF) and from the Greenbook record. The state of monetary policy is inferred from the deviation of the U.S. Fed funds rate from the target rate, using a smooth transition function. Applying the local projections method to quarterly U.S. data, we find that the federal government spending multiplier is substantially higher under accommodative than non-accommodative monetary policy. Our estimations also suggest that federal government spending may crowd-in or crowd-out private consumption, depending on the extent of monetary policy accommodation. The latter result reconciles—in a unified framework—apparently contradictory findings in the literature. We discuss the implications of our findings for the ongoing normalization of monetary conditions in advanced economies.

Subject: Accommodative monetary policy, Expenditure, Financial services, Fiscal policy, Monetary policy, Real interest rates, Zero lower bound

Keywords: Accommodative monetary policy, Fed funds rate, Fiscal policy action, Fiscal policy interaction, Government spending shock, Local projections, Nominal interest rate, Real interest rates, Spending multiplier, State of monetary policy, WP, Zero lower bound

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/114
Stock No:

WPIEA2015114
ISBN:

9781513572185
ISSN:

1018-5941

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