The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
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.