The Government Spending Multiplier in a Multisector Economy

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)