The Nexus between Public Debt and the Government Spending Multiplier: Fiscal Adjustments Matter*

Abstract

AbstractThis paper studies the evolution of government spending multipliers in the post‐war USA using a time‐varying parameter VAR model. We achieve identification by imposing sign and zero restrictions on the systematic component of policy rules and impulse responses. Our results show that the US multipliers in the post‐OBRA93 period are smaller than those in the 1970s. The multipliers are found to be more strongly correlated with the estimated coefficients of the debt‐stabilizing rule than the debt‐to‐gross domestic product ratios. The increased magnitude of fiscal adjustments appears to be the major driving force behind the decline in multipliers rather than debt accumulation itself.