Cyclical Variation in the Government Spending Multipliers: A Markov-switching SVAR Approach

Abstract

We explore a century-long dataset with a Markov-switching structural VAR to estimate state-dependent government spending multipliers. We show that the multiplier values are statistically larger during recessions than during expansions. However, the multipliers are always smaller than 1. Our model has two features. First, we combine quantitative data and qualitative indicators to infer the regimes of the economy across which the multipliers differ. Second, we propose a simple method to estimate impulse response functions that allows for regime changes after the shock. We argue that these two features are important for reconciling the main findings in previous studies.