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

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Mr. Constant A Lonkeng Ngouana
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Series:
IMF Working Papers
Volume/Issue:
Volume 2015: Issue 114
Language:
English
Publication Date:
27 May 2015
DOI:
https://doi.org/10.5089/9781513572185.001
ISBN:
9781513572185
ISSN:
1018-5941
Pages:
44
Keywords:
WP; fed funds rate; government spending shock; nominal interest rate; Spending multiplier; accommodative monetary policy; local projections; fiscal policy action; state of monetary policy; fiscal policy interaction; Zero lower bound; Real interest rates
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2015: Issue 114