(Not) Dancing Together: Monetary Policy Stance and the Government Spending Multiplier
IMF Working Papers, May 27, 2015
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- (Not) Dancing Together: Monetary Policy Stance and the Government Spending Multiplier
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Bibliographic details
- Authors: Vincent Belinga, Constant A Lonkeng Ngouana
- Published: May 27, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513572185.001
Methodology
- Government spending shocks are identified 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.
- The local projections method is applied to quarterly U.S. data to estimate dynamic responses to government spending shocks.
Key findings
- The federal government spending multiplier is substantially higher under accommodative than non-accommodative monetary policy.
- Federal government spending may either crowd-in or crowd-out private consumption, depending on the extent of monetary policy accommodation.
- The variation in the multiplier across monetary policy states reconciles—in a unified framework—apparently contradictory findings in the literature.
- The analysis is conducted for the United States using SPF and Greenbook-based identification and a smooth-transition measure of monetary stance.
Implications for policy
- The effectiveness of fiscal stimulus via federal government spending depends critically on the stance of monetary policy: accommodative conditions raise the multiplier.
- Normalization of monetary conditions in advanced economies may reduce the effectiveness of government spending as a stimulus tool relative to periods of accommodative policy.
- Policy coordination considerations: the interplay between fiscal actions and the state of monetary policy should be accounted for when designing fiscal interventions.
Subjects and keywords (as stated by the authors)
- Accommodative monetary policy, Expenditure, Financial services, Fiscal policy, Monetary policy, Real interest rates, Zero lower bound
- 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
_(Not) Dancing Together: Monetary Policy Stance and the Government Spending Multiplier — Vincent Belinga, Constant A Lonkeng Ngouana, May 27, 2015._
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