Do Government Spending Multipliers Depend on the Sign of the Shock?

Abstract

We analyze whether government spending multipliers differ by the sign of the shock. Using aggregate historical US data, we apply Ben Zeev's (2020) nonlinear diagnostic tests and find evidence of nonlinearities in the impulse response functions of both government spending and GDP. We then extend Ramey and Zubairy's (2018) framework to allow for asymmetric effects as a type of state dependence to estimate multipliers. While we find differences in the impulse response functions, the resulting multipliers do not differ by sign of the shock. Thus, declines in government spending do not have different effects on economic activity than rises in spending.