Article, 2023

The Government Spending Multiplier in a Multisector Economy

In: American Economic Journal Macroeconomics, ISSN 1945-7715, 1945-7707, Volume 15, 1, Pages 209-239, 10.1257/mac.20200213

Contributors (3)

Bouakez, Hafedh [1] Rachedi, Omar [2] Santoro, Emiliano [3]

Affiliations

  1. [1] HEC Montréal and CIREQ (email: )
  2. [2] Ramon Llull University
  3. [NORA names: Spain; Europe, EU; OECD]
  4. [3] University of Copenhagen
  5. [NORA names: KU University of Copenhagen; University; Denmark; Europe, EU; Nordic; OECD]

Abstract

We study the effects of aggregate government spending shocks in a production network economy where sectors differ in their price rigidity, factor intensities, use of intermediate inputs, and contribution to final demand. The model implies an aggregate value-added multiplier that is 75 percent (and $0.32) larger than that obtained in the average one-sector economy. This amplification is mainly driven by input–output linkages and—to a lesser extent—sectoral heterogeneity in price rigidity. Aggregate government spending shocks also lead to heterogeneous responses of sectoral value added, which are larger among upstream industries. We present novel empirical evidence supporting this prediction. (JEL E12, E16, E23, E43, E52, E62, H50)

Keywords

amplification, contribution, demand, economy, effect, empirical evidence, evidence, factor intensity, final demand, government spending, government spending shocks, heterogeneity, heterogeneous response, industry, input, input-output linkages, intensity, intermediate inputs, linkage, model, multipliers, multisector economy, network economy, novel empirical evidence, one-sector economy, percent, prediction, price rigidity, response, rigidity, sector, sectoral value, shock, spending, spending shocks, upstream industry, use, value-added multipliers, values